In this issue:
- San Juan airport privatization winner announced
- Airports opting out of TSA screening
- Contract towers benefit small airports
- Will RJ retirements doom small airports?
- Inbound cargo screening’s December deadline
- Thoughts on “corporatizing” airports
- News Notes
- Quotable Quotes
On July 19th, the Public-Private Partnership Authority (PPPA) of Puerto Rico announced the winner of its competition for a 40-year lease of Luis Munoz Marin International Airport. Aerostar Airport Holdings, a 50/50 joint venture of Mexican airport operator ASUR and New York-based Highstar Capital, offered an up-front lease payment of $615 million, while committing to $1.4 billion in capital improvements to the airport. Overall, the PPPA estimates the total economic value of the deal at $2.6 billion.
ASUR is the largest investor-owned airport group in Mexico, operating nine airports under long-term concession agreements. The biggest of these is Cancun, named the best airport in Latin America for the last three years. ASUR’s other eight airports include Merida, Cozumel, and Veracruz. The company trades on both the New York Stock Exchange and the Mexican Bolsa. Highstar Capital is a private equity firm, founded in 1998, that currently manages $5.6 billion including funds in energy, transportation, and environmental infrastructure.
Financial close on the deal awaits FAA approval and the award of a Part 139 operating certificate to Aerostar. This will be the first full-fledged transaction completed under the federal Airport Privatization Pilot Program, which was recently expanded by Congress from five airports to 10. Because the deal received the consent of 80% of the airlines serving the airport, the lease proceeds may legally be used by the Puerto Rico government for non-airport purposes. That was not the case in the only previous lease under the Pilot Program: Stewart Airport in New York State. Without the required 65% airline approvals, New York had to use those lease proceeds within its state-owned airport system. Sources tell me that Puerto Rico’s advisors on the procurement drew inspiration from the terms offered to airlines in the lease developed for Midway Airport several years ago-a deal that was blessed by the airlines serving Midway but could not be financed due to the credit markets crunch. (Puerto Rico’s advisors are Credit Suisse, Leigh Fisher, Mayer Brown, and Pietroantoni Mendez & Alvarez.)
The International Air Transport Association praised Puerto Rico’s process. In a statement published in Aviation Daily, IATA said “Airlines were a true partner in the development of the terms of this agreement. The unique approach that the PPPA has taken within the pilot framework set by the FAA provides an excellent template for future airport privatizations.” Also praising the process was Greg Principato, president of Airports Council International-North America, who suggested that the successful outcome in Puerto Rico may stimulate similar privatizations elsewhere in the United States.
As of now, of the nine remaining slots in the pilot program, seven are still available, assuming that Chicago makes use of its slot for Midway and that the Hendry County Airglades cargo airport project in Florida proceeds.
Two more airports have been approved by TSA to participate in its Screening Partnership Program (SPP). Orlando Sanford airport was approved in June and Glacier Park Airport in Montana got its OK in July. And Bozeman Yellowstone applied to join SPP in June, joining Sacramento in the queue awaiting a TSA decision, which must occur within 120 days of the application being filed. That new deadline is one of several reforms included in the FAA reauthorization bill approved by Congress in February.
More reforms to SPP may be in the offing. On July 10th, I testified before the subcommittee on transportation security of the House Homeland Security Committee. In inviting me to testify, the subcommittee specifically asked me to make recommendations concerning SPP and passenger screening. In my testimony, I explained that the legislation creating TSA built in a conflict of interest, under which the agency both regulates airport security and carries out one of its major components, passenger and baggage screening. I pointed out that neither Canada nor Europe operates this way. In Canada, the TSA’s counterpart (CATSA) contracts with a dozen private security firms to provide screening at the 89 airports where screening is required. And in nearly all of Europe, screening is the responsibility of the airport, under national government oversight and regulation, and in most cases airports can either provide the screening themselves or outsource it to approved security firms.
I also reminded the Members that in the fall of 2001 when the ATSA legislation that created TSA was being debated, the House bill removed screening responsibility from the airlines (for which it was an unfunded-and unregulated-mandate) and devolved it to the airports, under federal regulation. It was only the Senate bill that called for a new federal workforce to provide airport screening. But in the conference committee, the Senate approach largely prevailed.
Given the superior cost-effectiveness of the screening being provided by certified security companies, I recommended two sets of reforms. In the near term, I said, the SPP should be reformed so that the airport, not TSA, selects the contractor, based on proposals submitted to the airport by TSA-certified firms; the airport, not TSA, would also manage the contract. Hence, at SPP airports, TSA’s role would be solely regulatory. That would also eliminate today’s divided approach to airport security, and would allow the screening contractor the option of providing additional security functions (such as access control and perimeter security), if the airport desired.
Longer-term, though, I recommended that the ATSA legislation be changed, to remove the operation of airport screening from TSA’s functions, clearly separating security regulation from operations (as is, incidentally, called for by ICAO Annex 17, Standard 3.4.7). You can download my complete written testimony from the Reason website: http://reason.org/news/show/improving-airport-security-testimon.
To my pleasant surprise, a bill has been introduced in the Senate to do just that. S. 3303, by Sen. Rand Paul (R, KY), would require that all passenger screening be provided by private security companies, while permitting baggage and cargo screening to also be outsourced, at each airport’s option. I have no idea if this legislation will go anywhere, but to the best of my knowledge, it’s the first time in either house of Congress that legislation has been drafted aiming at removing TSA’s built-in conflict of interest.
Since it began in 1982 as part of the effort to rebuild the ATC system following the 1981 strike, the FAA’s Contract Tower Program has expanded to 250 low-activity towers. (Interestingly, though the initial pilot program was begun by the Reagan Administration, its major expansion took place during the Clinton Administration, with bipartisan support from Congress.) Airports with contract towers include Northwest Arkansas, Phoenix-Mesa Gateway, Hawthorne and Oxnard (CA), Bridgeport (CT), Tweed-New Haven, Key West, Naples (FL), Gwinnet County (GA), Dubuque, Lihue (HI), Bloomington (IN), Shreveport, Hyannis, Worcester, Branson, Joplin, Bozeman, Trenton, Santa Fe, Niagara Falls, Brownsville, Laredo, Galveston, Waco, Yakima, Parkersburg, Cheyenne, and Jackson Hole.
Since resources are always limited, the fact that contract towers cost far less to build, operate, and maintain than comparable FAA-run towers means that more small airports can have the safety benefits of having a tower. The cost-effectiveness of contract towers has been studied periodically by the DOT Office of Inspector General, and its latest findings confirm previous ones. In testimony before the House Aviation Subcommittee on July 18th, Inspector General Calvin Scovel reviewed OIG’s latest findings, based on FY 2010 data. Using a matched set of contract and FAA-run towers, the report found that the average operating cost in FY 2010 was $2 million for an FAA tower and $537,000 for a contract tower-i.e., it costs nearly four times as much if the government runs the tower.
Does that mean contract towers are less safe? Scovell’s testimony pointed out that contract tower controllers must meet the same certification requirements as FAA controllers and have an FAA Control Tower Operator license. And the safety record of contract towers surpasses that of comparable FAA towers. Using data on 240 contract towers and 92 comparable FAA towers, the rate of occurrence of runway incursions was 11.55 per million operations for contract towers and 24.01 for FAA towers. The rate of operational errors was 1.24 for contract and 4.54 for FAA, and the rate of operational deviations was 0.83 for contract towers compared with 3.08 for FAA towers.
Who can possibly object to this performance record? The National Air Traffic Controllers Association provided the only skeptical input at the hearing. NATCA executive vice president Tricia Gilbert questioned the safety data, contending that the numbers for contract towers are basically self-reported, and the companies naturally want to look good. She recommended that the FAA extend to contract towers its voluntary, anonymous incident reporting system for its controllers (called ATSAP). Inspector General Scovel agreed with this in his testimony, and also called for better FAA contractual oversight-e.g., to ensure that controllers in contract towers actually work the number of hours the companies are being paid for, based on their staffing plans.
While I agree that company self-reporting of safety incidents and hours work leaves something to be desired, I was taken aback by a second OIG report, released just a week after the contract tower hearing. Its audit of FAA’s ATSAP program found significant problems, including many reports of controller misconduct rather than only safety incidents. Anything reported via ATSAP is responded to in a “non-punitive” manner, which means controller misconduct incidents essentially get a free pass if self-reported via ATSAP. That’s quite different from the well-established voluntary airline incident reporting system, on which ATSAP was supposedly modeled. So while I agree that better FAA oversight of contract tower safety incidents is warranted, ATSAP needs fundamental reform before it can serve as a reliable vehicle for such oversight.
Back in March, the FAA Forecast Conference included a panel discussing an Aviation Week study on the impact of the impending phase-out of first-generation regional jets (seating 37 to 50 passengers). Today’s high fuel costs make these planes very expensive to operate, and regional airlines are phasing them out in favor of second-generation RJs with more efficient engines, seating 70 to 90 passengers. But many smaller airports don’t generate enough passengers to fill these larger jets. The analysis identified 43 U.S. airports where the largest planes serving them were 37 to 50-seaters.
So what are smaller airports, and the cities they serve, to do? Aviation Daily (March 28) reported a consensus among panelists at the Forecast Conference that “there are too many small airports.” Small-airline service to many such airports has been subsidized by the federal Essential Air Services (EAS) program; other airports get grants from a federal Small Community Air Services Development Program. EAS has been budgeted for a record $214 million in FY 2013, while SCASD gets about $15 million per year. But with the federal budget verging on insolvency, discretionary programs such as these are probably not sustainable.
Boyd Group International issued a report in March, suggesting that small airports prepare for “irreversible economic realities.” The report estimates that about 100 small airports will lose scheduled service in coming years. Many of these would do better to send their air travelers by highway to the nearest regional airport, using the highway system as spokes to those hubs (and as I’ve pointed out in a previous issue, this would be a good market for the fast-growing luxury bus industry). Michael Boyd of Boyd Group believes regionalization will be forced on many smaller airports, as has been happening in central Illinois, where traffic has been shifting from smaller airports to Bloomington-Normal over the past six years.
But another option is on the horizon: regional airlines replacing 50-seat RJs with 70-seat turboprops such as the ATR-72 and the Bombardier Q400. On shorter-haul routes, their gate-to-gate time is almost as short as that of RJs, but their fuel burn is significantly less, reducing their operating costs. Canadian regional airline Jazz is replacing its entire fleet of 50-seat RJs with 74-seat Q400s. Competitor WestJet ordered 45 Q400s in May (20 firm orders, 25 options). And last year ATR sold 157 ATR-72s worldwide. U.S. regional carrier Colgan, now in Chapter 11, is selling its fleet of Q400s, with a number of RJ operators considered potential buyers. While 72 to 74 seats may be too large for airports now being served by 37-seat RJs, the larger turboprops could be competitive for many of the airports now served by 50-seat RJs.
Still, with the likely medium-term demise of EAS and SCASD, Boyd’s concept of smaller cities agreeing on regional gateway airports makes a lot of sense, on the merits. Whether it is compatible with local politics is another question.
On May 10th, the GAO released an update on TSA’s efforts to comply with a congressional mandate to screen 100% of cargo from overseas carried on passenger aircraft (known as “belly cargo”). The agency had still not met the mandate, and the report (GAO-12-632) implied that it might not meet its revised deadline of December 2012. But it acknowledged that TSA was making progress on an effort to develop mutually recognized standards for cargo security with other countries.
About a week later, TSA announced that it would, indeed, meet the deadline-and by Dec. 3rd, at that. How it proposed to do this was not explained until June 1st, when the New York Times carried a detailed article on that subject. The United States and the European Union had just announced an agreement to recognize each other’s screening procedures for belly cargo as equivalent to their own. A similar agreement was reached with Canada. How the mandate will be met regarding belly cargo from Asia, Africa, and Latin America remains a mystery.
But while some members of Congress thought they were mandating that every individual package on a cargo pallet be X-rayed, what has been agreed to is not exactly that. As a spokeswoman for EU transport commissioner Siim Kallas explained, mutual recognition “means that compliance with EU security rules also meets the US requirement of 100% screening of air cargo.” The EU rules focus on maintaining a secure supply chain, from the cargo’s point of origin, where it is inspected, so that it cannot be tampered with while in transit to the airliner into whose cargo compartment it is loaded. This is similar to TSA’s program for domestic cargo screening, in which cargo originators (e.g., manufacturers) and freight forwarders get vetted as Certified Cargo Screening Program (CCSP) participants. That is a sensible, risk-based approach.
There is, as yet, no comparable program for all-cargo carriers, as the GAO report noted, even though most inbound cargo arrives in the United States via such carriers, rather than as belly cargo on passenger flights. And as of the time GAO completed this report, “TSA has not yet weighed the costs and benefits of requiring all-cargo carriers to submit screening data, [though] by doing so TSA could determine whether this additional data could enhance is efforts to identify potential risks for inbound air cargo, develop cost-effective strategies and measures to manage these risks, and provide additional assurances that all-cargo carriers are complying with TSA’s enhanced screening requirements.”
In my article last issue on the excellent Airport Cooperative Research Program (ACRP) guidebook on airport privatization, I lamented the report’s failure to discuss “corporatization” as a less-drastic reform of airport governance, as used in a number of countries. One of the authors emailed me that they had drafted a chapter on that subject, but the oversight panel had judged it to be not germane. At my request, guidebook primary authors Sheri Ernico, Steve Van Beek, Bruce Boudreau, and Dan Reimer have provided the following summary of their findings on airport corporatization.
“Internationally, many governments have taken steps toward commercialization and/or corporatization as an alternative to, or as an interim step towards, airport privatization. Commercialization is often the first step towards full privatization and transferring control of the airport to the private sector, but full privatization does not have to follow. It allows the asset to become more valuable for a potential lease or sale by allowing the true revenue potential to be developed and maximized.
“While corporatization of airports has been popular outside the United States, airports in this country have not been corporatized in the international style. Although some U.S. airports may be operated by an ‘airport corporation’ that has some attributes of a private corporation and/or is managed by individuals with titles like President, CEO, or CFO, no U.S. airport has been converted to a true private corporation. For example, the Rhode Island Airport Corporation (RIAC), a subsidiary of the Rhode Island Port Authority and Economic Development Corporation, operates T. F. Green Airport and five general aviation airports using a corporate management structure pursuant to a lease and delegation of authority from the Rhode Island DOT. RIAC has been characterized (in an advisory opinion to the governor) as having ‘some distinct corporate attributes’ but to be ‘primarily and sufficiently public in nature.’ As another example, Eagle County, CO created the Eagle County Air Terminal Corporation (ECAT) for the purpose of constructing and operating a new commercial passenger terminal at the Eagle County Regional Airport. The ECAT was characterized by a reviewing court to be a ‘government-owned and controlled non-profit corporation authorized to issue its own revenue bonds.’
“State law may bar true corporatization as a result of, for example, a prohibition under a state constitution or statute on financial contributions by cities or counties to private entities, a prohibition on the delegation of public functions to private entities, or simply insufficient delegation of authority to create or participate in a private corporation. In contrast, virtually all states explicitly authorize the creation of public airport authorities and/or intergovernmental agencies to own and operate airports. These attributes of state laws plainly account for or contribute to the proliferation of single-purpose airport authorities and the absence of truly private airport corporations in this country.
“These limitations may not apply at the federal level. There are all manner of private and quasi-private entities operating at the direction of and/or with the assistance of the federal government. However, the U.S. government does not own and operate airports. In stark contrast, many airports around the world are, or have been, owned by a national government. This too may help to explain why there are no private airport corporations in the United States but many around the world.”
My thanks to the authors for providing this summary of their findings. It seems to me that historic state provisions against governments investing in private corporations (a legacy of numerous 19th-century bankruptcies of state-sponsored railway and canal companies) do not necessarily prevent a city from seeking a corporate charter for its airport while retaining 100% of the ownership. And if that transition can be made, what would prevent that city-owned enterprise from subsequently diversifying its capital structure by offering a portion of the shares to outside investors-e.g., a global airport operator, an infrastructure investment fund, or individual investors via an IPO? From where I sit, a further exploration of airport corporatization would be a worthy topic for a future ACRP study.
Briscoe Field Privatization Rejected. Local opposition by airport neighbors to the prospect of Briscoe Field, in the Atlanta suburbs, attracting commercial airline service under privatization apparently triggered rejection of the proposal by a vote of the Gwinnett County Board of Commissioners last month. Based on that vote, the County has withdrawn its application to the federal Airport Privatization Pilot Program.
TSA Broadens PreCheck Program. Earlier this month, TSA expanded the PreCheck program at Sea-Tac Airport from one airline to five. In addition to original participant Alaska Airlines, PreCheck members belonging to frequent flyer programs at American, Delta, United, and US Airways may also use the PreCheck lanes. This is another step forward in the evolution of the TSA’s first serious risk-based program.
What’s in the ACRP Privatization Report’s Appendices. As I noted in last month’s article on the excellent report on airport privatization from the Airport Cooperative Research Program, six detailed appendices are only available on the CD-ROM that comes with the hard-copy version you can purchase. The main report’s table of contents does not list them, so to whet your appetite, here is what they are:
- Appendix C: International Airport Privatization, Lessons Learned, and Transaction Summaries (77 pp.)
- Appendix D: Non-Airport Privatization in the U.S. Transport Sector (61 pp.)
- Appendix E: Emerging Domestic Issues Influencing U.S. Airport Privatization (22 pp.)
- Appendix F: U.S. Regulatory and Policy Framework (48 pp.)
- Appendix G: Key Stakeholder Interests and Concerns (43 pp.)
- Appendix H: Detailed Airport Case Studies (121 pp.)
Beefing Up On-board Security Cost-Effectively. The House passed its appropriations bill for the Department of Homeland Security in June, and dealt with a number of amendments affecting aviation security. An amendment to add $50 million for the poorly justified Federal Air Marshals program failed on a roll call vote, 60 to 355. But an amendment to add $10 million to the cost-effective Federal Flight Deck Officer program was agreed to by a voice vote. Unfortunate from my perspective were the failures of amendments to cut all funding for TSA’s poorly justified Behavior Detection Officers and another to prohibit TSA screeners from wearing badges that make them appear to be law enforcement officers.
Spain-Brazil Joint Venture to Bid on Airports. Two global companies that have focused mostly on privatized toll roads have created a joint venture company to bid for the state-owned airports of Portugal and Spain. Brazil’s CCR and Portugal’s BRISA created the venture to go after AENA, owner-operator of all the major airports in Spain, and Aeroportos de Portugal, which owns eight airports including those in Lisbon and Porto, plus the Azores. CCR created a separate airports division in January to manage the major shareholdings it acquired in the airports of Quito (Ecuador), San Jose (Costa Rica), and Curacao.
Front-of-Line Companies Announce New Airports. The two companies that provide members with access to the front of long screening lines, CLEAR and Flex, have added airports to their networks. CLEAR has begun operations at DFW’s Terminal E, which serves Alaska, Delta, Frontier, JetBlue, Spirit, United, US Airways, and Virgin America. Flex has announced service at Tallahassee in addition to its launch customer, Jacksonville (FL). Both companies are working hard to sign up additional airports.
Phoenix’s Second Airport Announces Expansion Plan. Last month Phoenix-Mesa Gateway Airport unveiled a $1.4 billion long-term expansion plan. The first phase will be a new terminal with 14 gates, aimed at handling a projected 3 million annual passengers; estimated cost is $145 million. Subsequent phases, if traffic growth warrants, would eventually lead to a 60-gate terminal. Gateway is currently served by Allegiant and Spirit, and handles about 3% of the 40 million people using Phoenix Sky Harbor each year.
Atlanta, Seoul, Copenhagen, and Sydney Are Best Airports. According to the sixth annual survey from the University of British Columbia’s Sauder School of Business, the most efficient large airport in the United States is Atlanta, with Copenhagen best in Europe, Seoul best in Asia, and Sydney best in Oceania. The Global Airport Benchmarking Report is a project of the Air Transport Research Society, based at Sauder. It ranks airport efficiency using data on aircraft movements, passenger and cargo volumes, non-aeronautical revenue, and other operational expenses. The best U.S. airport in the under 15 million annual passengers is Raleigh-Durham, and the best overall in Canada is Vancouver.
United Rejects Secondary Cockpit Barrier on 787s. To the dismay of its pilots’ union, United Airlines has told Boeing not to include the secondary cockpit barriers that are apparently standard equipment on 787 jetliners. The airline has barriers in place on its 777 aircraft, and has no plans to remove them. Regarding the airline’s directive to Boeing on the 787s, ALPA’s letter to United said “It makes no logical sense for a safety and security conscious airline with the history of United to pay for the removal of this device that further protects the flight deck from those with hostile intent.”
Court Rejects Challenge to Ft. Lauderdale Runway Extension. A U.S. District Court on July 6th rejected the city of Dania Beach’s request for an injunction to halt construction of the south runway at FLL. Broward County has thus far spent about 10% of the project’s $800 million cost since starting construction in January. The County and Dania must now either reach a settlement or proceed to a trial on the city’s lawsuit claiming that the Army Corps of Engineers did not evaluate possible health impacts of airport noise on residents.
Trusted Traveler Agreement between United States and South Korea. Last month DHS and South Korea announced a reciprocal agreement between the two countries, in which U.S. members of Global Entry and Korean members of that country’s Smart Entry can make use of each other’s entry kiosks. The United States already had such reciprocal agreements with Canada and the Netherlands.
“Just to be clear, secondary [slot] trading [among airlines] is fine. It is primary trading that is verboten. Trousering the odd windfall gain is one thing. Paying admission so you can be standing waiting for the windfall is altogether different. Apparently, there cannot be primary trading . . . [because] it is the airlines that built up the airport by flying there, promoting their flights to that place, and making it a success. . . . the ‘but for’ argument. The slot-constrained airports with an active secondary market around the world are places like London, New York, Chicago, and Sydney. It is important to understand that it is only because the airlines fly there regularly that these are great cities. But for BA, in the case of Heathrow, London would not be a major financial center, a major trading center, and a major tourist attraction. BA did that, even before the invention of flight. . . . The airlines are entitled to own the slots in these places because, without them, London, New York, Chicago, Sydney and others would all be backwaters.”
-Andrew Charlton, “Slot Reform: Who Owns What?” Aviation Intelligence Reporter, February 2012
“A large number of airports in the United States today are totally dependent on the 50-seat airplane for access to the air transportation system. There are going to be some smaller airports that will not be able to sustain service over the long term. It is therefore absolutely time for them to think about alternative uses of their facilities.”
-William Swelbar, MIT International Center for Air Transportation, quoted in Janet L. Levere, “As They Lose Traffic, Once Bustling Airports Have Space to Rent,” The New York Times, July 9, 2012
“What emerges from the vast majority of the studies of regulatory reform, not only in the United States but more generally, is that the users of air services, both passengers and freight consigners, have, on average, benefited considerably. Although counterfactuals are inevitably difficult to specify, and become more so as time passes, Steven Morrison and Clifford Winston provide widely accepted estimates for the United States that welfare gains to travelers amount to $12.4 billion annually (in 1993 prices), with business travelers being the greatest beneficiaries. Put another way, 58 percent of the decline in airfares between 1976 and 1993 can be attributed to deregulation; the rest is attributed to ongoing technological improvements, such as more fuel-efficient engines and enhanced air traffic control.”
-Kenneth Button, “Ongoing Government Failures in Air Transportation,” Mercatus Center, George Mason University, May 17, 2012