In this issue:
- Airport privatization after Midway
- Cockpit secondary barriers?
- Airline up-gauging and congestion pricing
- Inspector General on TSA’s behavior detection
- PreCheck expanding to more airports
- Another WTC lawsuit thrown out
- News Notes
- Quotable Quotes
After Midway, Whither US Airport Privatization?
I was as surprised as nearly everyone else by Chicago Mayor Rahm Emanuel’s decision early last month to halt the privatization process for Midway Airport. The decision came after one of the two finalists appeared to be pulling out, leaving only the Macquarie/Ferrovial team in the running. With support for privatization from the City Council uncertain, Emanuel decided to pull the plug, rather than negotiating with the only bidder.
That may have been the political path of least resistance, but as I told a Bond Buyer reporter, the city might still have been able to negotiate a deal that met its key requirements, since serious negotiations had not yet begun. Clearly, the city’s desire for both a large up-front payment and significant ongoing revenue sharing reduced Midway’s attractiveness to investors, but you never know how good a deal you can get until you negotiate.
In the aftermath of the announcement, there were various hints that Chicago might try again, which would require trying to hang onto its slot. My view, expressed in a blog post at the time, was that five years of sitting on the only “large hub” slot in the federal Airport Privatization Pilot Program was enough. By occupying that slot, Chicago was precluding serious consideration of privatization by any of the other 28 airports defined by FAA as large hubs (based on annual passenger counts). But those doubts were put to rest by the recent disclosure of Mayor Emanuel’s September 9th letter to the FAA formally withdrawing its preliminary application to the Pilot Program. So the large-hub slot is, in fact, open.
In previous years, under various political leaders or candidates for office, airport privatization has been proposed or debated for a number of these large hubs, including Atlanta, BWI, Boston, Dulles and DCA, JFK and LGA, LAX, Minneapolis/St. Paul, and Philadelphia. I am not aware of any current discussions about privatizing these or other large hubs, but that possibility is now open. Given the enormous unfunded pension liabilities of many U.S. cities, I would not be surprised if one or more of those owning a large hub airport began to calculate how much they might generate to shore up their ailing pension funds via a long-term lease of their airport.
Are Cockpit Secondary Barriers Cost-Effective?
Ellen Saracini is the widow of United pilot Victor Saracini, who died when hijackers took over the cockpit of UA 175 and crashed it into the south tower of the World Trade Center on Sept. 11, 2001. Today she is a principal advocate for federal legislation to mandate the installation of secondary barriers on all commercial planes with hardened cockpit doors, to better secure the flight deck when the cockpit door is opened in flight (e.g., for meals or lavatory visits). A bill to mandate this, with bipartisan sponsorship, the Saracini Aviation Safety Act of 2013, is pending in the House and a companion measure was introduced in the Senate last month. Pilots generally support the measure, while airlines are uniformly opposed.
Meaning no disrespect to Ms. Saracini, the way to decide whether secondary barriers make sense is not via emotional appeals about 9/11 but via serious cost-benefit analysis. And fortunately, excellent analysis of this question has been done by a pair of researchers I have cited previously, Mark Stewart (University of Newcastle, Australia) and John Mueller (Ohio State University). Stewart and Mueller have devised several valid methodologies for estimating the cost-effectiveness of various aviation security measures, and their book on the subject is Terror, Security, and Money: Balancing the Risks, Benefits, and Costs of Homeland Security (Oxford University Press 2011).
One such method is to estimate the annual cost of a security measure or set of measures, estimate the benefits of a terrorism incident prevented by the measure(s), and then do a break-even analysis to calculate the minimum probability of a successful attack required for the benefits to exceed the cost. In a paper published this year in the journal Risk Analysis (Vol. 33, No. 5), they apply this method to cockpit protection, with the possible added measures (in addition to the existing hardened doors) being (1) Federal Air Marshals (FAMs) (2) the armed-pilots program (Federal Flight Deck Officers), and (3) installed physical secondary barriers (IPSBs). All three have the same aim-to supplement hardened doors to prevent terrorists gaining control of the cockpit, and they could be used separately or in any combination.
Analyzing these measures separately, and using plausible estimates of the cost of each and of the benefits (costs avoided) of a single-plane 9/11-type attack, they find the following results:
|Measure||Cost-Effective if Terror Attack Occurs|
|FAMs||More than two per year|
|FFDOs||One every 50 years|
|IPSBs||One every 200 years|
In other words, secondary barriers are the low-hanging fruit to supplement the effectiveness of the existing hardened cockpit doors. Armed pilots are not quite as good, but since they cost very little, they are also a good kind of insurance policy. The real loser is FAMs. Why is this? Stewart and Mueller use FY 2011 budget numbers, under which the FAM program cost $950 million per year. Thanks to recent budget cuts, it will likely be $821 million in 2014, but that sum buys very little protection, since FAMs are present on only about 5% of flights. Since they travel in pairs and require first-class seats, they cost airlines about $250 million a year in lost revenue. Those factors are all taken into account in the benefit-cost calculations.
By contrast, the FFDO program costs TSA only about $25 million a year, since the pilots volunteer for the required training. And FFDOs are present on about five times as many flights as FAMs. As for secondary barriers, the authors use a worst-case estimate of $30,000 per plane (when some estimates are less than $10,000) and amortize this over an average 20-year life of the plane.
(Note: I have summarized and simplified the extensive calculations and sensitivity analysis used by the authors; interested readers should consult their Risk Analysis article for details: “Terrorism Risks and Cost-Benefit Analysis of Aviation Security.”)
My recommendation to the airlines is that instead of looking bad by opposing the Saracini legislation, they should support a friendly amendment: Eliminate the poorly justified Federal Air Marshal program (saving $820 million per year) in exchange for a one-time expenditure of $60 million to equip the airline fleet with secondary barriers ($10,000 times 6,000 aircraft). That would be more effective and a lot less costly than the status quo.
Airline Up-gauging-and Congestion Pricing
I experienced a real déjà vu moment on August 12th, when I saw a front-page headline in Aviation Daily reading, “Up-gauging Emerging as Key Capacity Strategy.” The article recounted how airlines like US Air are switching orders from smaller Airbus A319s to larger A320s and A321s, and how Delta is replacing 50-seat regional jets with new 76-seaters, and in turn, replacing 76-seaters on other routes with larger Boeing 717s. I had to laugh, thinking back to my arguments with airline officials on up-gauging back in autumn 2007.
That was when the Mary Peters DOT was trying to address the huge congestion problems at the three main New York airports with market-based measures—either slot auctions or runway congestion pricing. The DOT general counsel invited me to a meeting of the Aviation Rulemaking Committee they had set up to get airport and airline input on these measures. Sitting in that meeting, I was blown away by the vehement airline arguments in opposition, which did not appear to be well-supported, either by good economics or by evidence.
Reason Foundation was already working on a major policy study on the potential of runway congestion pricing for the three airports, which I disclosed in that meeting. That soon led to a nearly two-hour conference call at which various airline people sought to persuade me that neither slot auctions nor pricing would work, or that they would create unacceptable side effects. I took note of each of their concerns, and made sure that our study addressed each of them (https://reason.org/news/show/congestion-pricing-for-the-new).
One key impact of runway congestion pricing, according to extensive research, would be that airlines facing increased charges to land and take off during high-demand periods would up-gauge a number of flights-e.g., substituting one 717 for two regional jets, providing the same or increased passenger capacity at the expense of the previous level of flight frequency via the smaller planes. The airline people insisted this would not happen, and that they needed all the existing frequencies to satisfy customer demand.
But in the course of our research, I came across the results of an FAA-sponsored simulation exercise, done by several universities in FAA’s NEXTOR consortium. In 2004-05, they carried out several “strategic games” to test various government policies aimed at reducing congestion at LaGuardia Airport. Six teams took part in the games-four representing major airlines, one from the federal government, and one from the Port Authority. The airline teams each worked through scenarios of adjusting their flight schedules in response to various administrative and pricing policies. George Donohue and Karla Hoffman of George Mason University summarized these exercises in a Reason Policy Brief (https://reason.org/news/show/evidence-that-airport-pricing). To cut to the chase, congestion pricing produced the best results in terms of reducing LGA congestion. And the key to that result was . . . up-gauging. Faced with peak runway charges (for both take-offs and landings) in the $800-$1,200 range, the airline teams crunched their numbers and decided that somewhat reduced frequencies and a larger average size plane made the most sense.
Eventually, the Peters DOT gave up trying to introduce a modest slot-auction plan at the New York airports. But they did put through a change in DOT’s airport rates and charges policy to permit airports to use congestion as a factor in runway charges. The airlines challenged it in court and lost. So that policy remains in force, waiting for any airport management with a chronic congestion problem to try it out.
Inspector General Lets TSA’s SPOT Program Off the Hook
After reading and writing about (in Issue No. 59, July/August 2010) the GAO’s withering critique of TSA’s SPOT (Screening of Passengers by Observation Techniques) program, I was eager to read what the DHS Inspector General’s Office had to say about the program three years later. Alas, while the IG report (OIG-13-91, May 2013) has a lot of critical things to say, its recommendations are trivial, and they pose no threat to the continued existence and growth of a program that has failed to demonstrate any aviation security value.
Let’s first review a few numbers from the new IG report. SPOT began in FY2007 with Behavior Detection Officers (BDOs) assigned to 42 generally larger airports and a modest budget of $20 million. It has grown significantly since then, despite zero evidence of effectiveness, to 176 airports and a FY2012 budget of $205 million. The hard-hitting 2010 GAO report pointed out that there is no peer-reviewed science behind the program’s basic concept: that minimally trained former TSA screeners can do very brief interviews with passengers awaiting screening and identify various behavior cues that identify them as risks to aviation security. And that is still the case.
The OIG report does say that “TSA cannot assess the effectiveness or evaluate the progress of the SPOT program.” It notes that the data TSA does collect are “incomplete and inaccurate.” It also says that “TSA has not developed performance measures for the SPOT program,” and notes that even though its purpose is to “identify high-risk individuals who may pose a threat to transportation security,” the only data it collects “do not provide a measure of program effectiveness.” That’s because the only data TSA compiles are on those few cases in which the BDOs “refer” someone to a law enforcement officer. In FY2012, those referrals resulted in a grand total of 176 arrests (out of an estimated 657 million passengers going through TSA screening). And apparently none of those arrests were for anything related to terrorism; the OIG audit says they were mostly for outstanding warrants, drug possession, or being an illegal alien.
But the OIG report never once says TSA should develop an outcome measure based on spotting potential terrorists. It focuses attention on errors and deficiencies in the data on referrals-as if that were a useful measure of the program’s effectiveness. So its recommendations are all procedural: TSA should implement a strategic plan for the program, including “a system to measure performance”; beef up the referrals database so it is more accurate and complete; provide recurrent training for BDOs (for their non-evidence-based method of spotting terrorists); etc. And of course, TSA agreed with all the recommendations and says it was already implementing most of them.
This is pretty pathetic, and is no match for the previous GAO report (GAO-10-763), which I advise concerned members of Congress to re-read. SPOT is just as questionable now as it was in 2007-only it’s spending ten times as much money.
PreCheck Expanding to 60 More Airports
The good news for frequent flyers is that TSA’s almost-trusted-traveler program is expanding, in two meaningful ways. First, the agency is moving to implement the program at 60 more airports, bringing the total to 100. And second, it plans to add additional PreCheck lanes to at least some of the original 40 airports as membership in the program increases. (Note: on my last trip from MIA, in late September, there was a long line to get into the sole PreCheck lane in the north terminal, the first time I or my fellow travelers had ever experienced this.)
In addition, according to a Sept. 4th bulletin from TSA, “JetBlue and Southwest are expected to begin participating [in PreCheck] whenever operationally ready.” That suggests that TSA is still clinging to the model that PreCheck is an airline-specific program rather than the open-to-all-who-qualify model that it announced earlier this year. But once TSA starts enrolling paying members, it will presumably have to allow them to use PreCheck lanes regardless of which airline they are flying.
The bad news is another TSA announcement, reported by Bloomberg News on Sept. 10th. In order to achieve its goal of having 25% of all daily passengers using PreCheck by the end of next year, it will choose passengers not enrolled in PreCheck on a case-by-case basis to go through PreCheck lanes. According to the article, “Passengers will be chosen after a background check, before they get to the airport, according to an article to be published in the Federal Register.” Say what? It turns out this “background check” is nothing more than the Secure Flight check carried out on every single passenger, based on full name, date of birth, and gender.
That is a farce. By that standard, nearly everyone going through security would be eligible to use PreCheck lanes, except for those on TSA watch lists and no-fly lists. This “enhancement” of PreCheck should be recalled as inherently defective.
Another World Trade Center Suit Thrown Out-But Another Is Still Pending
The false premise that airlines were at fault for the hijackers being able to board the flights that brought down the World Trade Center is still making its way through the courts, as plaintiffs and their lawyers seek to force airline insurers to pay huge claims for lives and properties.
In July, federal judge Alvin Hellerstein threw out a suit against American and United based on this premise filed by World Trade Center developer Larry Silverstein. The same judge is scheduled to hear a similar case being brought by Cantor Fitzgerald, a financial firm that lost 658 employees in the attacks. It has sued American Airlines, alleging negligence and seeking compensation from AA’s insurers for lost business and destruction of its offices.
Unfortunately, Judge Hellerstein’s grounds for rejecting Silverstein’s suit was that the latter had already collected $5 billion from his own insurers for his WTC losses. The judge cited state law barring “windfalls and double recovery on the same loss.”
That may be valid legal reasoning, but it ignores the plain facts about the terrorists’ success in boarding the planes. The screening companies hired by the airlines followed then-current FAA rules, which did not ban the only known weapons the hijackers brought on board-box cutters. And they and the airlines also used the CAPPS pre-screening system in the dumbed-down manner required by US DOT at that time to avoid singling out any of the hijackers for additional screening.
So the blame for a very flawed aviation security system on 9/11 lies with the US government, not with the airlines or their screening companies. These suits should be dismissed with prejudice on those grounds.
Gary Airport Shortlists Two Privatization Bidders. From the 10 proposals submitted in August, the Gary/Chicago Airport selected two finalists: GCIA Group and Aviation Facilities Company. Neither offered an up-front payment, nor did either offer to pay the $800,000 costs the airport has incurred in getting to this point. The RFP did require each to commit to investing or attracting $100 million into the currently money-losing airport.
Brazil Expands Airport Privatization Program. Two more major airports-Galeao in Rio de Janeiro and Tancredo Neves in Minas Gerais-will be offered during the fourth quarter of 2013. The concession period for the former will be 25 years and for the latter, 30 years. State-owned airport company Infraero will hold a 49% share in each concession. Separately, Sao Paulo state announced that it will offer 30-year concessions for five of its airports.
New Club Opens at Atlanta Airport. For those who are not members of Delta Airlines’ Sky Club but have time to kill at ATL, the new “Club at ATL” offers food, drinks, workspace, and showers for $35 per visit. It’s the latest location for non-airline clubs offered by Airport Lounge Development of Plano, TX, following earlier clubs at DFW, Las Vegas, Raleigh, and San Jose. And the company says other locations are in prospect in the near future.
India’s Privatization Program Expands. The Airports Authority of India announced last month that six more airports will be privatized. RFQs for the first two-Chennai and Lucknow-were issued Sept. 2, to be followed soon by solicitations for Kolkata, Guwahati, Jaipur, and Ahmedabad. The concessions will be for 30 years, and AAI will garner 49% of airport revenues, consistent with the existing concessions at New Delhi and Mumbai.
London City Airport Proposes Major Expansion. On Sept. 19, privately owned London City Airport applied for planning permission to spend $320 million to double its passenger capacity to 6 million per year. The investment would expand the terminal, add a taxiway, and add new parking stands for aircraft, facilitating an increase in annual flights from the current 70,000 to 120,000. The airport is owned by Global Infrastructure Partners, a joint venture of Credit Suisse and General Electric.
Belgium Privatizes Two Airports. The Flemish government has awarded 25-year concessions to French infrastructure company Egis to upgrade and operate the Antwerp and Ostend-Bruges airports. The former primarily serves business traffic while the latter serves both tourist and freight traffic.
Global Entry Correction. In last issue’s article on expanded Trusted Traveler programs, I mistakenly wrote that Global Entry members must insert their card in the kiosk. A reader pointed out that only one’s passport is inserted in the kiosk, as I verified last month when using Global Entry for my clearance to return to the United States from Vancouver. I was dismayed to find there were only two such kiosks at YVR, requiring a number of us to stand in line waiting to use one.
“There is . . . an air of unreality about the lawsuit that Justice filed Aug. 13 to block the [AA-US] merger. Throughout there is an undertone that, after years of bouncing between profitability and loss, all is now right with the U.S. airline industry. . . . The truth is that for much of the previous decade, the industry was so beset by overcapacity that it could not price its product rationally. Even including those baggage and change fees, the average inflation-adjusted, round-trip domestic ticket price has declined 36% since the industry was deregulated in 1978. Meanwhile, the price of jet fuel has soared, up 30% since 2007 and 165% since 2000. The upshot: on average, a U.S. carrier must fill 81% of its seats just to break even on a flight, up from 78% in 2007 and less than 70% in 2000.”
-Editorial, “Airline M&A Sense and Nonsense,” Aviation Week, Aug. 26, 2013
“It would seem that the entire DoJ case against this merger swings on the passengers’ entitlement to cheap fares. This merger runs the risk of producing the outcome of a profitable airline. The DoJ seems to think it is anathema. Do passengers have an entitlement to cheap fares? No, they have an entitlement to safe air transport. That obligation falls on the shoulders of the regulators. So does the airlines’ entitlement to a fairly umpired marketplace. Other American carriers have been allowed to consolidate. Why not AA and US Air? It is not the job of the DoJ or any other anti-trust agency to assume that passengers are entitled to cheap fares. It is their job to ensure that there is no market dominance other than that earned by hard work and a better product, and to ensure no collusive behavior. This DoJ application is mission creep.”
-Andrew Charlton, “The DoJ, AA and USAir: So Much for Competition,” Aviation Intelligence Reporter, September 2013