Airport Policy and Security News #86

Airport Policy News

Airport Policy and Security News #86

PreCheck Expansion Plans, Privatized Airport Capacity?, Portuguese privatization, Contract Towers

In this issue:

PreCheck’s Dubious Expansion Plans

As of December 20th, when John Wayne Airport (SNA) began offering the program, TSA had achieved its 2012 goal of having its PreCheck program in place at 35 airports; TSA announced that some 5 million travelers passed through PreCheck lanes during the year. But while that is good progress, the program still leaves much to be desired as a risk-based trusted traveler program.

To begin with, it is still a largely airline-focused program, with only five participating carriers (Alaska, American, Delta, United, and US Airways). Those airlines do not share information about members recruited via their frequent flyer programs, so if you are (as I am) an American frequent flyer in PreCheck and use Delta to go to and from Atlanta, you don’t get to use the PreCheck lanes for that trip. At last month’s aviation security conference of the American Association of Airport Executives, airport leaders urged TSA to implement “reciprocity” among participating airlines. TSA Administrator John Pistole did not offer that, but said the agency is (1) urging the existing five airlines to recruit more of their frequent flyers into PreCheck, (2) urging those five to share information with their alliance and code-sharing partners, and (3) talking with other U.S. airlines about joining PreCheck (Frontier, Hawaiian, JetBlue, and Southwest). But those steps would still leave PreCheck as essentially an airline frequent-flyer perk, instead of a real trusted traveler program open to everyone who qualifies.

And that brings me to a second criticism. The only “background check” undergone by PreCheck members is their airline travel history. (TSA says it also runs the names against its watch lists, but it does that for everyone who flies, so that adds nothing.) By contrast, the real trusted traveler programs operated by TSA’s sister agency, Customs & Border Protection (CBP), do require an FBI criminal history background check (and payment of a $100 processing fee). So that when you sign up for, say, CBP’s Global Entry, not only do you have to pass that background check and pass a simple in-person interview. You also get a biometric ID card, enabling you to prove that you are the person who was pre-cleared when you show up at the airport.

Those two features-a criminal history background check and a biometric ID card-are integral to every true trusted traveler program, whether in the United States or in a growing number of other countries. By accepting less than this for passengers who have access to planes through the front doors, but requiring airport workers who have access to planes through their back doors to have real background checks and ID cards, TSA is operating with a double standard that undercuts PreCheck’s credibility as a truly risk-based program. This also makes PreCheck vulnerable to a political backlash if and when some terrorist group manages to recruit a frequent-flyer member who attempts some kind of mayhem.

So instead of trying to grow the program by further airline-specific expansions, TSA should be required by parent agency DHS to convert PreCheck into a real trusted traveler program. While it could continue to use airline travel history data as part of the background check, it must add the same kind of background check used in CBP trusted traveler programs and a comparable biometric ID card. And yes, members should pay the costs for those features. If DHS does not move in this direction, Congress should direct TSA to do so.

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Do Privatized Airports Expand Capacity?

When airports are leased or sold these days, few eyebrows are raised. However, in surface transportation, there is considerable controversy over long-term concessions for existing toll roads (termed “brownfield leases”) but there is general support for long-term concessions under which investors finance, build, and operate new toll roads (“greenfield” projects) under essentially identical concession agreements. Critics of leasing existing toll roads view these deals as creating monopoly providers who will simply charge captive customers sky-high rates to use their facility, generating profits rather than investing serious sums in improving them.

While that contention is mistaken with respect to privatized toll roads, it is worth looking into the extent to which airports acquired by investor-backed airport companies exploit their existing capacity versus expanding and improving it to benefit their customers. I’m aware of no systematic study of this question, but a perusal of my files has found a number of interesting examples showing significant capital investment in existing airports that have been privatized, either via medium/long-term concessions or via outright sale.

In Latin America and the Caribbean, capacity expansion is the primary rationale for airport privatization, which is mostly done via medium/long-term build-operate-transfer (BOT) concessions. The largest recent example is Brazil, where the winning bidders in this year’s auctions have contractual commitments to significant investments to expand and improve these inadequate airports, as follows:

San Paulo Guarulhos: $2.6 billion (20-year concession)
San Paulo Viracopos/Campinas: $5.0 billion (30-year concession)
Brasilia Kubitschek: $1.6 billion (25-year concession)

Those required investments are in addition to the billions the companies have paid up-front to lease the airports.

Other concessions in the region are providing a major new terminal in Bogota (under construction), the new terminal at Montego Bay, Jamaica (in operation), and a planned modernization of the terminal at Kingston, Jamaica (in the planning stage). In addition, the airport serving the top tourist destination in the Dominican Republic, Punta Cana, boasts a new 10,171 ft. runway and a new control tower financed and built by its private-sector operator Grupo Puntacana, both opened to traffic in November 2011.

In Germany, Fraport is investing $5.8 billion to expand and modernize Frankfurt Main airport, including the addition of a fourth runway, which entered service in October 2011. Fraport acquired the land on which the runway is located by purchasing, at market value, a large adjacent industrial property. It has worked closely with corporatized air traffic control provider DFS to reconfigure the airspace in the airport’s vicinity to minimize noise exposure from all four of its runways.

In London, BAA (as it was then called) invested £4.3 billion (about $6.5 billion) on a completely new Terminal 5 at Heathrow and is now rebuilding and modernizing Terminal 2 for another $1.6 billion. GIP, which acquired Gatwick from BAA several years ago, is under way on a $1.87 billion expansion of its airside and landside facilities, and hopes to get permission to add a second runway after 2019.

At the AAAE/Leigh Fisher airport privatization conference in Miami last April, I heard an interesting presentation by Amit Rikhy of Vantage Airport Group, which bought already privatized Liverpool airport several years ago. One of their first investments was to reconfigure the security screening area so as to reduce the average screening time from 20 minutes to 10 minutes. As expected, this led to passengers having more time to spend in the airport’s post-security retail areas, so airport revenue went up, along with passenger satisfaction.

The specifics of the governance agreement between the airport operator and the underlying government can affect the extent and nature of capital investment. Early last year the Luton (U.K.) Borough Council threatened to terminate its 30-year concession agreement with its Abertis/AENA joint venture operator (LLAOL) over the issue of capacity expansion. The government wanted LLAOL to double the airport’s capacity to 18 million annual passengers by 2020. LLAOL judged that to be well beyond what made economic sense, and pointed out to the government the substantial compensation it would be owed if the government exercised the agreement’s termination clause. By June, the two parties had worked out an agreement for a more-modest capacity expansion and an extension of LLAOL’s concession by three years, to 2031.

This brief report is purely anecdotal, but the subject would make for a good research project, such as a Ph.D. dissertation. I hope someone decides to pursue this.

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Portuguese Airports: Veni, Vidi, Vinci

The political fallout over the privatization of ANA Airports of Portugal that I mentioned last month failed to stop the conclusion of that deal, despite the collapse of the sale of TAP Portugal to German Efromovich’s Synergy Group (which operates Avianca) because of “financial concerns.” The disposal of both the airline and the airports is, broadly speaking, a condition of Portugal’s European Union debt bailout.

The successful bidder was France’s Vinci Concessions, which used to be a big player in the airports business with interests in China (Beijing Capital Airport), Africa and Mexico. For half a decade or so in the noughties, Vinci dropped off the radar having sold off most of the airport interests to concentrate on toll roads, where it has a big presence, and in construction, where it started and which still accounts for 70% of its revenues. But it kept its hand in by hanging on to a couple of airport concessions in Cambodia and by participating at a low level in the “privatization” of some smaller regional French airports (which effectively means management contracts to run those airports on behalf of the local Chambres de Commerce, which are licensed to operate them by the French government).

Apart from the partial IPO of Aeroports de Paris in 2006, that is what French airport privatization still amounts to. There must have been frustration at Vinci, which, having prepared itself for the long anticipated (and proper) privatization of more-substantial big city regional airports like Marseille, Nice and Bordeaux, found itself thwarted first by the credit/financial crises and subsequently by the election of the socialist regime of Francois Hollande last year, which is less likely to continue with privatization. Hollande himself seems preoccupied with introducing his 75% income tax rate on high earners.

Acquiring ANA has moved Vinci back into the big league though. The Portuguese airports will handle around 30 million passengers in 2012, predominantly international passengers, with annual growth averaging above 4% over the past decade. Through the acquisition of ANA, Vinci Airports will again become a significant international player in airport concessions, with 23 airports now managed in Portugal, France and Cambodia.

Vinci Concessions was selected to become the ANA concession holder for 50 years at the country’s 10 airports: Lisbon, Porto, Faro and Beja on the mainland; Ponta Delgada, Horta, Flores and Santa Maria in the Azores; and Funchal and Porto Santo in Madeira. The deal was worth around €3.08 billion ($4.04 billion), with Vinci the highest bidder by some distance, offering a figure that valued ANA at 15 times its EV/Ebitda, broadly in line with other 2012 transactions (e.g. Edinburgh, UK). Germany’s Fraport offered €2.44 billion, the Corporacion America consortium (Argentina) offered €2.41 billion and Flughafen Zurich (Switzerland) offered €2.0 billion. Vinci will acquire 95% of ANA while employees will hold the remaining 5%. Under the deal, Vinci will be required to pay an immediate deposit of €100 million as a guarantee that it will proceed with the agreement, and has nine months to complete payment. Meanwhile, €1.2 billion will be used to cover the grant and €700 million will be used to repay debt. The completion of the sale is expected by the end of 2013.

It is not immediately clear what value Vinci sees in these airports to offer 54% more than the lowest bid, echoing the crazy prices paid in the first round of Brazilian concessions. The construction of a new airport for Lisbon was originally part of the deal, which is perhaps why there were hardly any interested parties for five years. That requirement was temporarily suspended but will kick back in now that this deal is complete. Portugal looks like it will be mired in debt for years to come and the future of TAP remains uncertain. Some of the regional airports have been growing in 2012, but not by much, and some like Horta and Beja would definitely be considered “dogs.” A new Lisbon airport will be needed eventually because the exiting (Portela) airport is hemmed in by suburbs. The one bright spot on the horizon is that, as Iberia begins to scale down its presence in the Europe-Latin America market (which made Madrid by far the biggest hub in that market), there will be more opportunities for TAP to ramp up its offer via Lisbon. It has already begun to increase its European services, with extra capacity to seven European capital or economically important cities from summer 2013, doubtless with an eye to switching passengers to its own long haul sixth-freedom flights.

There is also the suspicion, which Vinci has done nothing to allay, that it might use ANA and its influence in Latin America (especially the Portuguese-speaking Brazil) as a bridge to further airport management contracts there and also in Asia. That would represent a 360 degree round trip back to the position it was in at the beginning of the previous decade.

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.

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Contract Towers Continue Serving Small Airports Well

Not many people are aware that 250 small U.S. airports have control towers operated not by the FAA but by one of three companies that operate them under FAA contracts. The program began with five airports in 1982, as part of the Reagan administration’s effort to rebuild the ATC system in the wake of the illegal PATCO strike. It had grown to 27 towers by 1993, when Congress (at the urging of the Clinton administration) expanded it via 1994 legislation. The program expanded again in 1998, with a new cost-sharing program to permit airports that would not normally qualify for a tower to have one if they were willing to cover part of the costs. Of the current 250 contract towers, 228 are FAA-funded, 16 are in the cost-share program, and six are Air National Guard towers.

Contract towers are not liked by the controllers’ union, which contends that their lower staffing levels and lower pay scales pose safety risks. Hence, Congress periodically asks the DOT Office of Inspector General to review the cost and performance of the contract tower program. Between 1998 and 2003, OIG did four such assessments, each time finding that contract towers cost significantly less to operate than comparable FAA-run towers and that they are at least as safe, as measured by the usual metrics of operational errors, operational deviations, and runway incursions.

The latest such OIG assessment was released on Nov. 5, 2012. It not only validated the previous findings but, if anything, showed even greater cost-effectiveness today than did the previous assessments. Most of the summaries and articles about the report (AV-2013-009) understated the findings. In its “Results in Brief” up-front summary, OIG states the team’s finding on cost savings as “a contract tower cost, on average, about $1.5 million less [per year] to operate than similar FAA towers.” But that difference is meaningless without knowing the actual two cost numbers. So for those who haven’t read beyond the summary, here is Table 1 from the body of the report.

Table 1: Cost and Staffing Differences Between 30 Contract Towers and 30 Comparable FAA Towers
Average Air Traffic Density Average FY 2010 Cost Average Number of Air Traffic Personnel
FAA Tower 15.55 $2,025,104 16.23
Contract Tower 15.34 $536,911 6.03
Average Difference 0.21 $1,488,193 10.20

In other words, the typical low-activity FAA tower costs 3.77 times as much to operate as a comparable contract tower. And yes, most of that difference is due to lower staffing, although the controllers in the contract facilities (who are mostly ex-military controllers or retired FAA controllers) are highly qualified and FAA-licensed.

So is there a safety problem? The way to find out is not to use intuition or story-telling but to go to the data. And those data appear in the following excerpt from the OIG report’s Table 2.

Table 2: Rate of FY 2010 Safety Incidents at Comparable Contract and FAA Air Traffic Control Tower
Towers Operational Error Rate Operational Deviation Rate Runway Incursion Rate
240 Contract 1.24 0.83 11.55
92 FAA 4.54 3.06 24.01

In other words, low-activity FAA towers have 3.66 times the rate of operational errors, 3.69 times the rate of operational deviations, and 2.08 times the rate of runway incursions. Assuming those numbers are valid, this is an open-and-shut case of vastly superior cost-effectiveness. It’s not just, as “Results in Brief” says, that “contract towers had a significantly lower number and rate of safety incidents compared to similar FAA towers.”

The OIG report did make several recommendations to improve FAA oversight of contract towers. First, to ensure that contract tower controllers and managers are working all the hours the companies invoice FAA for, the agency should develop a way to validate invoices and timecards. Second, since the safety data are “self-reported” by contract tower management, individual controllers and managers at those towers should have access to the same kind of voluntary safety reporting system used at FAA-run facilities (such as the agency’s ATSAP system). In addition, FAA needs to ensure that it makes regular assessments of all contract towers. The FAA concurred with all three recommendations.

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TSA Finally Commissions Outside Study of Backscatter X-rays

A year and a half after TSA Administrator John Pistole told Congress the agency would commission an independent study of the safety of backscatter X-rays used in about half of all airport body-scanners, the study has finally been commissioned. In the interim, Pistole had backed off, saying that a review by the Department of Homeland Security’s Inspector General’s Office would suffice. That did not satisfy numerous critics, including Sen. Susan Collins (R, ME), who introduced legislation last January to require an independent review

The commissioning of that review was announced in mid-December. The National Academy of Sciences-an appropriate outside body-will review issues of radiation and safety in the use of backscatter X-ray body scanners, for both passengers and TSA screeners who must work long hours around the machines. An NAS committee will review current procedures for measuring radiation doses, as well as reviewing previous studies. It will assess “whether exposures comply with applicable health and safety standards” for passengers and employees.

The NAS study will not address privacy concerns related to body scanners, which concerns various civil liberties groups, including the Electronic Frontier Foundation (EFF) and the Electronic Privacy Information Center (EPIC). The latter had filed a lawsuit seeking DHS records on the safety assessments done by TSA and whatever third-party studies it had reviewed. EPIC said it was pleased that NAS has been commissioned to review the safety of backscatter machines. EFF faulted the narrowness of the study’s scope, wishing NAS had also been asked to review “whether the high economic and non-monetary costs associated with scanners are warranted.”

That is an excellent question, and so is EFF attorney Jennifer Lynch’s comment that “It’s appalling that TSA has waited until now-three years after it started to roll [body scanners] out at airports-to conduct this kind of study.”

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Follow-Up on JFK Terminal 4

In last month’s story about the PPP procurement by the Port Authority of a new central terminal for LaGuardia Airport, I managed to somewhat garble the story of the agency’s previous terminal PPP, the International Arrivals Terminal 4 at Kennedy Airport (JFKIAT) more than a decade ago. Sheri Ernico of LeighFisher, one of the principal authors of the ACRP report on airport privatization that came out last year, pointed out to me that a complete case study of JFKIAT can be found in the appendix of that study. She provided the following excerpt from that appendix.

“The project was completed in May 2001 at a construction cost of approximately 20% over the budgeted amount. (The final cost of construction was approximately $1.069 billion, compared to an original estimate in 1997 of $876 million. JFKIAT [the consortium] attributed the cost overruns to (1) staging costs, (2) unforeseen site conditions, (3) subcontractor disputes, and (4) architectural design features. JFKIAT was also highly motivated to complete the project by May 8, 2001 (the deadline in the lease) because upon the date of beneficial occupancy it could increase the per-passenger rates and realize significant increased revenues, as well as avoid paying a significant penalty under the lease if not finished by then. Due to the loss of time dealing with the existing conditions, it cost more to accelerate the later stages of construction.”

Sheri also points out that this particular form of privatization worked well for Terminal 4, because (1) it is the only one of JFK’s seven terminals not controlled by airline tenants under long-term leases, (2) there is little room for new airlines at the other six terminals, (3) JFK has a high percentage of international carriers who mostly use this terminal, and consequently JFKIAT had the ability to charge profit-based prices for airlines to use the terminal. It is also the only terminal at JFK with a 24-hour Federal Inspection Service.

I appreciate this additional information, which makes it clear that the Port Authority’s new PPP for the LaGuardia central terminal cannot be a carbon copy of the JFK deal.

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News Notes

Midway Lease Going Forward As predicted here last month, Chicago Mayor Rahm Emanuel has decided to proceed with leasing Midway Airport, using the slot it has held for some years in the federal Airport Privatization Pilot Program. The initial step will be a Request for Qualifications to which potential bidders can respond. The lease term is expected to be 40 years. By state law, at least 90% of the proceeds must be used for other infrastructure investments and/or to reduce the City’s debt load. Mayor Emanuel is seeking at least $1.4 billion up-front in order to retire Midway’s current debt.

Transport Canada Upgrades Cargo Screening Aviation Daily reports that the Canadian government is developing “a comprehensive air cargo security program that will be aligned with those of [its] key trading partners. In May 2012 the U.S. and Canadian governments agreed to recognize each other’s air cargo security regimes for direct shipments. Under Transport Canada’s Screening Equipment Qualification Approval Process, manufacturers can submit equipment for testing based on pre-established performance requirements.

Two More Brazilian Airports to Be Privatized On Dec. 21st, the Brazilian government announced that Galeao airport in Rio de Janeiro (the country’s second largest) and Confins airport in Belo Horizonte will be privatized, in an effort to expand and modernize them in advance of the 2014 soccer World Cup and the 2016 Olympics. The long-term concessions will follow the model previously used for the airports in Sao Paulo, Campinas, and Brasilia, with the winning bidder holding 51% and state airport operator Infraero 49%. The government estimates the auctions will yield $5.5 billion.

Venice Airport Stake for Sale The government of Venice, Italy announced last month that it will sell its 14.1% stake in Venice’s Marco Polo Airport. The airport company SAVE is already partially investor-owned. The market value of the city’s ownership stake is estimated at $71 million.

Reverse Privatization for Cardiff Airport? The airport serving the capital of Wales, Cardiff, was privatized in 1995 and is currently owned and operated by TBI. But its passenger numbers have been declining, due to competition from nearby English airports at Bristol and Birmingham. So the government has entered negotiations with TBI about purchasing the airport, in hopes of boosting its market share and attracting more international service.

Stansted Might Not Be Deregulated. Just before the holidays, Britain’s Civil Aviation Authority suggested that it might not remove runway price regulation from Stansted Airport after it is sold by the former BAA. Despite the three major London airports becoming independent competitors once the sale is completed, the CAA said “The evidence tends to suggest that we cannot be confident competition alone will deliver [protection for consumers]. However, this does not mean we would necessarily continue with traditional price controls-we would consult on that next year.”

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