In this issue:
- GAO misses key points in screening report
- “Up-gauging” and congested airports
- Airport privatization in Europe
- LaGuardia terminal PPP
- Canada’s expensive airports
- Gate-based screening?
- News Notes
- Quotable Quote
GAO Screening Report Misses Two Key Points
Earlier this month, the Government Accountability Office issued a new report on TSA’s Screening Partnership Program (SPP), under which airports may exercise their right, under the 2001 legislation that created TSA, to opt out of TSA-provided screening. GAO-13-208, “TSA Should Issue More Guidance to Airports and Monitor Private versus Federal Screener Performance,” sounds innocuous, and it is. It reviews previous studies that find performance by TSA-certified screeners now in operation at 16 airports is as good as or better than TSA screener performance at comparable airports. And it documents advantages to airports and TSA from SPP. Airports like the more customer-friendly service the contractors provide and their greater flexibility in matching staffing levels to passenger flows. And TSA’s airport-based Federal Security Directors appreciate that at SPP airports, they don’t have to be involved in deploying and managing screeners and are therefore better able to focus on security oversight.
But that didn’t stop long-time SPP foe Rep. Bennie Thompson (D, MS) from rushing out a news release calling on TSA to halt any further airport participation in the program until TSA gets a more detailed handle on SPP costs and benefits. Say what? Any fair reading of the GAO report will find it generally approving of SPP, but making minor recommendations for TSA to be more systematic in collecting and analyzing cost and performance data. Moreover, both the original ATSA legislation from 2001 and the FAA Modernization Act enacted in February 2012 mandate that TSA accept applications from airports wanting to opt out, and the 2012 law now requires TSA to approve them within 120 days unless the Administrator finds that such a change would either compromise airport security or reduce the cost-efficiency or effectiveness of screening at that airport.
But the fact that Rep. Thompson could put out that statement with a straight face reflects two key flaws in the GAO report. First, in reviewing previous evidence about the cost-effectiveness of SPP, it ignores the well-done comparative analysis of screening at San Francisco International (SFO) and Los Angeles International (LAX), two major hubs classed by TSA as Category X (the largest and biggest targets), with screening at SFO by private security under SPP and screening at LAX done directly by TSA. This report, by the staff of the House Transportation & Infrastructure Committee, found that thanks to both the incentives of being a business and the flexibility that exists in the private sector, screening at SFO is dramatically more productive, with each screener handling 65% more passengers than TSA screeners at LAX. This comes from better matching workforce with passenger load, with far fewer screener-hours at SFO spent standing around between peaks. Screening also costs far less at SFO, thanks to: a much lower attrition rate (less recruiting and training cost), use of part-timers and split shifts to match staffing to passenger flow, and little or no need to use TSA’s costly flying squad of fill-in screeners, the National Deployment Force.
The second GAO omission is about the process airports have to go through to participate in SPP. Until the 2012 legislation, an airport applied to TSA to opt out, and if via some inscrutable process TSA decided to say yes, then the agency itself would go through its list of certified screening firms and assign one of them to the airport. The 2012 law allows an applicant to work with its preferred screening firm in preparing the application and to request that TSA assign that firm to be its screening provider. But that’s a far cry from how competitive contracting is carried out by other government agencies-federal, state, and local.
As I pointed out in my testimony before the transportation subcommittee of the House Homeland Security Committee in July, standard practice is for the agency that seeks to contract out a service to define its requirements and its selection criteria in a request for proposals (RFP) which it sends out to all qualified providers. The providers that think they are a good fit submit proposals, and the agency applies its selection criteria to select the best value bidder.
GAO never made this comparison, and its recommendations about improving the process were all penny-ante: TSA should provide guidance on how it will assess proposals dealing with the cost-efficiency and screening effectiveness; it should explain to airports how it evaluates proposals, etc. And TSA agreed with these very minor changes: it will explain its selection process, and it posted 12 rather general pages about this on its website last month.
That leaves it to Congress to meaningfully reform the Screening Partnership Program. And that is what the chairman of the Transportation Subcommittee, who chaired the hearing at which I testified, plans to do next year. Rep. Mike Rogers (R, AL) told Bloomberg Businessweek in September that after 22 hearings on TSA over the past 18 months, he will offer a comprehensive reform proposal in 2013. According to the article, it “would give airports more power to hire private contractors for screening and make it [even] tougher for TSA to refuse.” The article also quotes Debby McElroy of Airport Council International-North America saying airports would support such an approach: “We strongly believe that airports should make the decision. If the airports decide to do it, there shouldn’t be barriers.”
The modest reform of SPP in 2012 originated in the House but passed in both chambers. Let’s hope its successor can do likewise.
“Up-gauging” as a Partial Solution to Airport Capacity Constraints
The Fall 2012 issue of The Journal of Air Traffic Control contains a thought-provoking article called “Rethinking Mega-Region Air Travel.” Author Fred Messina, Vice President of the Transportation practice at Booz Allen Hamilton, recounts the sorry state of airport congestion at some of America’s largest and most important hub airports: JFK, LGA, ORD, etc. His outside-the-box proposal is to substitute high-speed rail lines for most of the short/medium haul regional jet operations at those airports, freeing up capacity for larger, long-haul flights. His before/after graphic for ORD shows 550 mainline and 550 RJ flights before HSR and 850 mainline and 250 RJ flights after HSR, for an overall 33% increase in daily passenger throughput.
It sounds intriguing at first glance, but think about the economics of hub airports. To make a transfer hub work, an airline needs to link dozens or scores of spoke cities to the hub, enabling people from anywhere to transfer to a flight to anywhere. Messina’s example envisions ORD connected by HSR to Milwaukee, which would serve as a kind of collector hub for the HSR line to ORD. But that would convert what is now a two-segment trip into a three-segment trip, which would limit its attractiveness to passengers. In reality, for HSR to replace most RJ spoke flights, an airport like ORD would need dozens of HSR lines radiating out from it. That would cost many billions just for ORD, let alone all the other airports with similar congestion problems. And, incidentally, there has been no federal budget allocation for HSR during either of the past two years, and in the current and likely future federal budget environment, I don’t see much chance of an ongoing source of federal funding.
The underlying principle in Messina’s example is up-gauging: substituting planes with higher passenger capacity for those with lower capacity. When this has been proposed by airport planners (e.g., in several proposals discussed by the Port Authority of New York & New Jersey in recent years), airlines respond in a highly negative manner. They schedule hourly RJ service to and from busy hubs because their customers demand frequency, they say. And besides, if Airline A didn’t do this, it would lose business to Airline B which does-so they both do it.
But in Asia, we see evidence of up-gauging happening right now on certain short-haul routes. And this is not replacing an RJ with an A318. As the headline of an Aviation Week article on July 23, 2012 put it, “Short-Haul Widebodies: Asian Carriers Are Finding New Uses for the A-330.” For example, Skymark in Japan will soon be replacing medium-size 737-800s with huge A-330-300s for routes between Tokyo and Sapporo, Fukuoka, and Okinawa. The move reflects not just high demand but also the limited landing slots at Haneda Airport, from which Skymark serves Tokyo. Similar slot limitations face Garuda Indonesia at a number of its airport, and it, too, has ordered A-330s to replace some of its 737 services.
Is this kind of up-gauging conceivable in the United States? Back in 2007 when DOT Secretary Mary Peters was trying to bring about a pricing solution for the congested New York airports, I was advising DOT on the benefits of runway pricing. I had several long meetings with airline people, who were vociferously opposed to pricing. When I cited research on this issue suggesting that runway pricing would lead to up-gauging, they flatly denied this would happen. That was contrary to the findings of a research project funded by FAA’s NEXTOR program, in which “war games” that included airline participants simulated responses to a runway pricing regime. In that exercise, airlines responded to variable runway pricing by up-gauging. (And since they all faced the same prices at a particular time of day, the argument that “the competition made me do it” no longer applied.)
So I was taken aback earlier this month by an Aviation Daily front-page story about Delta trading in its 50-seat CRJ200s for 76-seat CRJ 200s, described by the reporter as “up-gauging its fleet.” In my 2007 experience, Delta was the strongest opponent of pricing and the strongest in arguing that up-gauging is not feasible for competitive reasons.
I’m glad to see this modest step toward making more efficient use of scarce runway capacity in the United States, as well as its more dramatic use in Asia. I’m certain that runway pricing is a far more practical and efficient way to maximize the value of a limited amount of runway and airspace capacity than building high-speed rail feeder lines to airports.
Airport Privatization News from Europe
China’s main sovereign wealth fund struck a deal to take a 10% stake in Heathrow Airport, by which Ferrovial-the leading shareholder-will further reduce its exposure.
CIC International, a subsidiary of China Investment Corporation, will be paying £257.4 million to Ferrovial for a 5.7% holding in Heathrow Ltd. (previously BAA) and £192.6 million to its other owners for an additional 4.3% of the operator.
The deal comes less than three months after Qatar Holding, the Middle Eastern sovereign wealth fund, reached an agreement with Ferrovial, Britannia Airport Partners, and Singapore’s own sovereign wealth fund GIC to buy 20% of Heathrow Ltd. for £900 million. The Chinese transaction values the equity of Heathrow Ltd. at the same £4.5 billion ($7.2 billion) implied by the Qatari deal.
Heathrow Ltd. also owns Stansted, Glasgow, Aberdeen and Southampton airports – although Stansted is about to be sold – and these airports now operate each under its own stand-alone brand. BAA decided to dump the corporate name and brand because it is no longer a British Airports (public) Authority (though it hasn’t used that title for decades anyway), because it isn’t fully British owned, isn’t a group, and because it doesn’t own all the commercial airports in Britain. (In fact it now owns about 6% of them, down from 11%).
If both deals are completed-the Qatari purchase is subject to approval by EU competition authorities, but CIC’s is not-Ferrovial’s stake in Heathrow will fall from 49% to 33.7%. Ferrovial will probably invest the proceeds. Its options include Portugal’s state-owned airport operator ANA, or bidding to build and run one of several large U.S. infrastructure projects not in the airports sector.
However the ANA deal is threatened by political fall-out there. There is the growing confusion over whether or not Portugal can actually use funds (anticipated to be around €1 billion) from the sale to reduce its budget deficit. That appeared to be the condition of the “troika” of creditors who bailed it out in the first place (i.e. the other members of the group of 17 European Union countries that use the euro, the European Central Bank (ECB), and the International Monetary Fund (IMF)).
The opposition socialist party proposes that the ANA and TAP (state airline) privatizations should be suspended until the government puts a “legal regime” into place to “safeguard national strategic interests.” The party also reiterated that the privatization should take place in a “transparent and ethical” manner. In the background it is also whipping up a storm about whether “national strategic interests” will be protected and, of course, about jobs.
This is all becoming reminiscent of the farce that the concession of Madrid and Barcelona airports in neighbouring Spain became a year ago, when it was summarily cancelled just before a general election with potential investors bailing out faster than passengers on the Titanic. Twelve months on, the new government there seems no nearer knowing what to do next.
Meanwhile, Heathrow Ltd. has shortlisted four bidders for London Stansted Airport: TPG, Macquarie Group, Manchester Airports Group in partnership with Industry Funds Management of New Zealand, and Morrison & Co in partnership with its fund Infratil and the New Zealand Superannuation Fund. Breaking news has it that Australia’s Retail Employees Superannuation Trust (REST) is joining this last consortium. So there will be three funds involved if that bid is successful and an operator whose experience is just of Wellington Airport in New Zealand (fair enough, it is the capital city), two very secondary airports in Britain (Glasgow Prestwick and Manston, Kent) and an aborted attempt to make a go of Luebeck Airport in northern Germany. That airport, which passed back into municipal hands when Infratil pulled out, was sold this month to a German/Turkish entrepreneur who paid €4 million but saddled himself with €40 million of debt into the bargain. He intends to invest €20 million and make the airport profitable by 2018. Good luck with that one.
The IPO on Milan’s SEA, which operates the two airports there, is off after only 30-40% of the shares were subscribed. This is the second time an attempt to privatize SEA has failed. Previously, in 2006, SEA sought to attract a trade buyer for 33% of its equity in a private auction but despite attracting four expressions of interest (from BAA plc, Babcock & Brown Ltd, Hochtief Airport and Goldman Sachs) only Goldman Sachs proceeded to a bid. Then the offer was withdrawn after it became apparent that the City of Milan would retain too much equity and power and because of the demise of national airline Alitalia. It was at that stage that the now aborted IPO was conceived.
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
New LaGuardia Main Terminal PPP Moving Forward
According to the November issue of Public Works Financing, a public-private partnership to replace the central terminal at LGA is on a fast track. The $3 billion project will be procured on as a long-term design-build-finance-operate-maintain concession, a mechanism seldom seen in the United States but common overseas for new terminals (Montego Bay, Jamaica), new runways (Bogota, Colombia), and entire new airports (Punta Cana, Dominican Republic). Under this kind of PPP, pre-qualified teams are invited to respond to an RFP, laying out what they will build, how they will finance it, and typically a baseline financial projection showing that the project is financially feasible. Under most such concession agreements, the private-sector party takes on the risk of construction cost overruns, late completion, and traffic and revenue. This mechanism is used worldwide for investor-built and operated toll roads and other infrastructure in addition to airports.
The Port Authority issued its request for qualifications (RFQ) in October to the 16 teams that had responded to its request for information (RFI) the previous autumn. Qualifications are due Jan. 25th, and detailed proposals will be due sometime next summer, in response to an RFP that will be issued to a short-list next spring. The terminal itself is estimated to cost $1.5 billion, which the winning bidder is expected to finance. PWF speculates that the terminal will be financed with tax-exempt special facility bonds, using airline rental payments as the revenue stream. The PA is expected to require an equity commitment by the developer/operator plus payment of ground rent and a share of net revenues generated by the terminal. The balance of the project-two large parking structures and other facilities–will be developed by the Port Authority, financed by bonds based on using passenger facility charge (PFC) revenues for debt service.
The project appears to have solid political support. New York Gov. Andrew Cuomo is reportedly in favor of the PPP approach, as is New Jersey Gov. Chris Christie. Recently hired PA executive director Patrick Foye has both governmental and private-sector experience with PPPs. So this unusual mega-project which some thought would never happen may actually be under construction by 2014.
If this project sounds vaguely familiar, there is a Port Authority precedent. The new Terminal 4 at JFK was financed in 1997 and developed under a similar PPP arrangement. Then-executive director George Marlin, with the support of then-Gov. George Pataki, championed the PPP approach, which built an excellent new terminal for an array of mostly non-U.S. airlines to use. The $689 million project experienced a cost overrun of about $100 million, and was hit hard by decreased air travel in the first several years after the 9/11 attack. The concession agreement was renegotiated, and the firms involved lost their equity investment. Thus, risk was transferred to the private sector in this case, and the airport continues to have a very fine terminal.
More Fighting Over Canadian Airport Costs
WestJet and other airlines have been complaining about the latest increases in the local per-passenger charge at several Canadian airports. The article that crossed my screen last week was headlined, “Calgary Airport Improvement Fee Hike to Hurt Canadian Airlines.” With a $2 billion makeover under way, that airport is increasing its Airport Improvement Fee (AIF) from $25 per passenger to $30. The article mentioned that Quebec City’s Jean Lesage International Airport is increasing its AIF from $25 to $27.
Earlier this year, I wrote about the rapid growth in air travel from U.S. border airports in places like Bellingham, WA and Niagara Falls, NY. Low-fare airlines like Allegiant offer Canadians a combination of lower basic fares and lower airline/airport taxes and fees, which can really add up for families on vacation. What accounts for this fairly significant disparity?
To some extent, it’s about different ways of packaging roughly the same costs. For example, the budget for air traffic control in the United States comes largely from aviation excise taxes that support the Aviation Trust Fund. The largest source of that money is the 7.5% tax on the value of each airline ticket plus the accompanying per-segment fee. By contrast, in Canada, airlines pay en-route and terminal charges to Nav Canada, so that is part of the airline’s direct operating cost (like payroll and fuel). But when Canada reformed its ATC system, creating Nav Canada as a self-supporting nonprofit corporation, the funding shifted from a U.S.-type passenger ticker tax to direct airline charges. Yet Canadian airlines persist in dividing their total annual ATC fee payments by the number of passenger miles and listing a phony “Nav Canada fee” on each airline ticket.
But that does not explain why the typical large airport AIF is about $25 in Canada compared with the typical $4.50 PFC in the United States. When the Canadian government several decades ago devolved all the principal airports from federal operation to local operation, the feds retained ownership and negotiated with each airport for an annual rent payment. There are no federal airport grants in Canada, so all airport capital improvements (runways, terminals, taxiways, parking structures, access roads, etc.) are paid for solely by the airport. Given that fact, the federal government did not put an arbitrary cap on the AIF, as Congress has done with the local airport PFC. So it’s hardly surprising that AIFs are four or five times higher than our PFCs. The money for “rent” and facility improvements has to come from somewhere, and if it weren’t coming from passengers directly, it would be built into some combination of airline runway charges and space rentals-costs which airlines would pass through to passengers via ticket prices.
So the real culprit in this U.S./Canada disparity is not the AIF-it’s the arbitrary federal rent payment, calculated as a percentage of each airport’s gross revenue and apparently going on forever. Generating $250 million per year for the Canadian government, that government has little interest in reducing or eliminating it. (One source estimates that the airports have paid in over $4 billion in rent over the past two decades, compared with their mid-1990s estimated value of $2 billion.) That being the case, I’m not surprised to see periodic talk in Canadian airport circles about allowing the airports to buy their way out of this heavy weight on their shoulders via some sort of privatization.
On several trips to Europe in recent years-to Prague, Stockholm, and Vienna-I have encountered airport screening at the departure gate instead of at a central location. But I have not seen this subject addressed in either the airport management or the airport security literature.
From the airport’s standpoint, gate-based screening eliminates the distinction between airside and landside shopping locations. That’s why you encounter retail opportunities at the above airports all the way from the curbside to your gate. My guess is that concession revenues per passenger are higher at airports with gate-based screening.
From a screening perspective, the operating concept requires screening equipment at every gate (higher capital costs) but uses roving security screeners and supervisors, which might mean lower payroll costs and less of a problem staffing to match peaks and valleys of passenger flow at a central checkpoint location.
Whether central or gate-based screening has lower net cost overall (after factoring in concession revenue differences) might depend on the size and type of airport, how it is configured, and how peaked its passenger throughput is.
On my return from the latest trip (Prague), I queried a colleague who works on aviation security at RAND Corporation. He was unaware of any research on this question, such as operations research modeling. It would make a great topic for an ops research PhD dissertation. And perhaps TSA itself will take a look at this issue. An Air Transport World article from Sept. 11, 2012 quoted Dominic Bianchini, TSA general manager of passenger screening, as telling the ACI-NA World Conference and Exhibition in Calgary that TSA is “putting more emphasis on modeling and simulation programs that can enable the agency to better analyze checkpoint efficiency.” While I would not expect TSA modeling to factor in differences in concession revenue, it would be interesting to see what they’d conclude about relative security costs and benefits from modeling central vs. gate-based screening.
U.S./Australia Trusted Traveler Reciprocity. Australia’s Customs and Border Protection agency announced last month that American members of the trusted traveler programs Global Entry, NEXUS, and SENTRI may use Australia’s automated border crossing system called SmartGate when they arrive at any of the country’s eight major international airports. No additional enrollment process is needed for U.S. trusted travelers age 16 and over, who are traveling on U.S. passports.
San Juan Airport Privatization on Track, Says New Governor. Gov.-elect Alejandro Garcia Padilla, who had campaigned against the previous government’s public-private partnerships (PPP) program, announced on Nov. 14th that the agreement to lease Luis Munoz Marin International Airport will proceed. “There is a signed contract, and I have to uphold the credibility of the Puerto Rican people before the world. I need the people who have come to invest,” he told newspaper El Nuevo Dia.
Daley Hints at Midway Lease. An article in the Chicago Sun-Times (Dec. 2nd) was headlined “Mayor Seeks Short Lease on Midway.” It quoted a mayor’s office statement from the previous day saying that he would consider a lease shorter than 99 years and would require the winning bidder to agree to a travelers’ bill of rights. Chicago has until Dec. 31 to tell the FAA either yes or no regarding making use of the sole large-hub slot in the federal Airport Privatization Pilot Program.
Orlando Considering Outsourced Screening. A Dec. 5 story on TV station WOGX reported that the Greater Orlando Airport Authority (GOAA) is discussing new customer service standards for all entities operating at the airport, including TSA. GOAA chairman Frank Kruppenbacher is quoted as saying that if TSA cannot meet those standards, the authority will consider putting the screening function out to bid. The board expects to receive a full report from its customer service committee in March and decide how to move forward thereafter.
Turkey Seeking Privatized Third Airport for Istanbul. With the two existing Istanbul airports apparently maxed out, the government is seeking private investors for a $6.5 billion third airport for the city. The three-runway airport would have a 750,000 square meter (8.1 million square feet) terminal, making it the world’s fourth-largest airport. Global and Turkish firms have expressed interest in this project, for which an RFP is expected in the near future. It is to be developed on a build-operate-transfer (BOT) concession basis
Minute Suites Celebrates 35,000 Guests. Airport short-stay accommodations provider Minute Suites announced on Nov. 23 that it has served 35,000 guests thus far, in their facilities at the Atlanta and Philadelphia airports. The company has announced a third location, in Terminal D at DFW, to open in 2013.
A Secondary Airport for Seattle? Early this month the FAA approved commercial passenger flights at Paine Field in the northern part of the Seattle metro area. The airport currently has no passenger terminal and serves general aviation, the adjacent Boeing Everett plant where 787s are assembled, and repair company Aviation Technical Services. Allegiant Air has expressed interest in serving Paine Field, and Alaska has said it would offer competing service there if Allegiant serves the airport. Strong opposition to commercial service is expected from nearby residents.
Portugal Takes Key Privatization Step. On Dec. 14, the Portuguese government formally granted to state aviation agency ANA a concession to operate the country’s eight major airports, along with the authority to manage a concession process for a new airport for Lisbon. The legal step of granting ANA a concession is intended to make it legal, under EU-IMF rules, for Portugal to use the proceeds from the already-underway privatization process to reduce its budget deficit. Bids are due from airport companies this month, and the government is expecting to reap between $1.3 and $1.9 billion from the process.
DHL Says It Meets Cargo Screening Deadline. Aviation Daily reported Nov. 12th that DHL Global Forwarding was on track to meet TSA’s Dec. 3rd deadline for 100% screening of inbound air cargo on U.S. passenger planes. Although that deadline was several weeks ago, TSA has not reported the extent to which the deadline has been met.
Kansai Airports to Be Privatized. The Financial Times reported earlier this month that the airports serving Osaka, Japan’s second-largest city, will be privatized. New Kansai International Airport Company is reportedly testing investor appetite for the airport assets.
New Airport Security Book. Billie Vincent, a former FAA aviation security specialist and now airport security consultant, has announced the publication of his book, Bombers, Hijackers, Body Scanners, and Jihadists. It discusses threats to aviation from 1929 to 2012 and Vincent’s thoughts on wise and foolish airport aviation security policies. Information: www.xlibris.com/Bookstore.
Reason Headquarters’ New Location. The think tank for which I work has left the Los Angeles office building where it had rented space for over two decades and relocated to its own building several miles away. The new address is 5737 Mesmer Ave., Los Angeles, CA 90230. Phone and fax numbers remain the same. Reason’s other office is in Washington, DC.
“According to GAO, the airports seeking to ditch the unionized federal screeners sought better customer service and greater workplace flexibility. Airport operators realize a bad experience at the hands of [screeners] encouraged travelers to get in a car or take a train to reach their destination. As GAO explained, ‘Passengers who have negative encounters with the screening process generally associate their experiences with the specific airport.’ The Screening Partnership [Program] takes a baby step in the right direction. Private screeners must still follow TSA protocols, so there’s no escape from being electronically undressed and photographed by X-ray machines or from gratuitous groping. Even with these severe limitations, top Democrats want the TSA to continue rejecting applications . . . . Right now, the performance of private screeners is assessed under a process directed by TSA. It’s not particularly surprising that this government agency is going to do everything it can to limit potential competition. Congressional auditors found ‘TSA has not conducted regular reviews comparing private and federal screener performance and does not have plans to do so.’ The agency isn’t about to document its own relative failure.”
-Editorial, “Government Auditors Show Need for Alternative to TSA,” The Washington Times, Dec. 17, 2012