Airport Policy News #124
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Airport Policy News

Airport Policy News #124

Why airport screening costs half as much in Australia, the costs of a third runway at Heathrow, airport privatization and more.

In this issue:

Why Australia’s Airport Screening Costs Are Half TSA’s

Did you know that airport security screening’s average cost in Australia is $3.50 per passenger compared with TSA screening that costs $6.70 per passenger? I didn’t either, until I read Chapter 5 of an important new book by Mark G. Stewart and John Mueller, Are We Safe Enough? Measuring and Assessing Aviation Security (Elsevier, 2018).

Over the past decade, Stewart and Mueller have been doing rigorous quantitative assessments of various aviation security measures, and I’ve cited their findings—on Federal Air Marshals, on PreCheck, and on other matters—in previous issues of this newsletter. Their methodologies look very credible, and they know where to go to get the numbers needed for their analyses.

Their work on screening costs is new to me, and this book’s chapter (backed up by Appendix A) may be their first publication of these findings. The question I hope you are asking at this point is: How does Australia accomplish less-costly checkpoint screening? To begin with, in Australia (as is also true of many countries in Europe), screening is the responsibility of the airport, operating under regulations promulgated and enforced by the national government. Most Australian airports rely on government-certified private contractors to do the actual screening, as in Europe and Canada. And all major Australian airports recover the direct cost of screening via security charges to airlines for passenger and baggage screening. But there is an exception, detailed in a footnote. Australia’s largest airline—Qantas—provides its own screening where it operates in dedicated terminals. In those terminals, Qantas is the designated Screening Authority.

I’m sure that opponents of contract screening, after reading this, will try to find flaws suggesting that Stewart and Mueller are making an apples-vs.-oranges comparison. But they have anticipated this, and discuss factors in Australia that lead to reduced costs as well as factors that increase costs, as compared with TSA’s screening. First, domestic passengers in Australia do not have to remove liquids from bags or remove their shoes, so checkpoint throughput should be faster. On the other hand, in Australia non-passengers (friends and family) can accompany passengers through the checkpoint, meaning the total number of people to be screened is much higher. If these policies applied here, I strongly suspect that TSA’s screening costs would be even higher.

Besides discussing several U.S. studies showing that contract screening (where permitted) is less costly than TSA screening, the authors (in Appendix A) also present the case of (privatized) Copenhagen Airport (CPH) in Denmark. Unusually for Europe, CPH does not use contract screening. Instead, all screening personnel are airport employees, operating in accordance with national government policies. The cost of checkpoint screening at CPH averages $3.20 per passenger, a bit lower than Australia’s $3.50. Citing 2016 figures from Statistics Denmark, they report that 97.6% of CPH passengers waited 5 minutes or less at the checkpoint.

Two cases—one using contract screening and the other using airport employees—do not fully settle the question. But they do suggest that screening is likely to be more efficient if devolved to the airport level, under national government supervision. In other words, with separation between regulation and service provision—unlike the model built into TSA by Congress in 2001.

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Airline Competition Brings New Growth to Small and Mid-Size Airports

Three years ago, only large hub airports seemed to be prospering. Medium and small airports lamented cuts in service from the Big Four U.S. carriers, and some analysts worried about the survival of the smallest commercial service airports.

The picture today is quite different. Here is recent data from Flight Global, as reported by Robert Silk in Travel Weekly (June 5th). Year-over-year growth rates are shown for three groups of U.S. commercial airports.

First half 2015 First half 2018
50 largest airports +4.4% +3.8%
Next 50 airports +0.5% +6.8%
Next 100 airports -0.6% +5.2%

Seth Kaplan of Airline Weekly attributes much of the increase at smaller airports to the rapid growth of ultra-low-cost carriers (ULCCs)—Allegiant, Frontier, and Spirit. Their growth has forced the major carriers to increase their regional services, reversing at least some of their previous cutbacks. Another factor is the rapid growth of international LCCs such as Norwegian and Wow, in particular.

One airport that has been significantly boosted by these trends is Stewart, north of New York City in the Hudson Valley. In the first four months of this year, its passenger numbers were up 104% over last year. Norwegian and Allegiant account for most of this growth.

USA Today had a lengthy article on this trend on May 23rd. It included a list of all the cities now served by relative newcomer international LCCs Norwegian, Wow, and newer carriers French Bee, Level, Primera, and XL Airways France. Some of their service is to large hubs such as Boston, Chicago O’Hare, JFK, LAX, and Orlando. But a growing amount of service is to mid-sized airports such as Austin, Cleveland, Oakland, and St. Louis. Major aircraft leasing company executives are now concluding that, per a recent headline in Aviation Daily, “long-haul LCCs are here to stay.”

Airports with room to grow are taking advantage of the trend. Denver, for example, last month broke ground on a $1.5 billion airside expansion that will add 39 gates to its three existing concourses. No longer a United fortress hub, DIA’s largest carrier is now Southwest, with United a close second, and ULCC Frontier in third place. Since 2011 DIA has added 11 new airlines, 13 new international destinations, and 28 new domestic ones. Orlando is doing likewise. Phase 1 of its under-construction second terminal was recently increased from 16 gates to 19, largely to accommodate the planned growth of Spirit. That fast-growing ULCC has announced 14 new destinations for its fall schedule from MCO, 11 of which are in Latin America and the Caribbean. The new terminal will house 12 or 13 carriers in Phase 1.

Interestingly, one fortress hub is also adding capacity. American Airlines accounts for nearly 90% of the passengers at Charlotte (CLT), but the airport has remained friendly to new entrants, with low-cost carriers increasing their share from 3% in 2000 to 9% in 2016. This fall CLT will open 9 new gates for airlines other than American. And in 2016 it reached a new lease and use agreement with its carriers—only 10 years’ duration, compared with the previous 30, and elimination of the former majority-in-interest clause that would have let airlines with the majority of traffic (American) veto expansion projects. That is what has given CLT the ability to add gates to attract LCCs and ULCCs.

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Third Runway for London Heathrow Still Faces Obstacles

After several decades of planning, studies, and debate, the UK Parliament voted last month by 414-119 to approve going forward with a much-needed third runway for London Heathrow (LHR), Europe’s busiest airport. The estimated cost is a staggering $18.6 billion. And that is in addition to $3.4 billion that the government has promised nearby communities in noise insulation, compensation, and local amenities improvements.

You might think that airlines using (or seeking to use) Heathrow would be cheering, but that is not exactly true. For many months, Willie Walsh, CEO of International Airlines Group (parent company of British Airways, by far LHR’s largest tenant) has been criticizing the proposal, arguing that it is far too costly. He insists that (somehow) the new runway should be built without raising the prices charged to use the airport. And he has also called for the government to force privatized Heathrow Airport to allow airlines to develop their own terminals.

The estimated cost of the third runway does seem bizarrely high and was the subject of a Financial Times article, “The Gold-Plated Reason for Heathrow’s Bloated Runway Costs” (March 25, 2018). The article explains that the economic regulation imposed on LHR, though nominally a simple price cap on runway charges, amounts to rate-of-return regulation of the kind historically applied to monopoly utilities in the United States. Since the rate of return is calculated as a percentage of the “regulated asset base,” the larger that number, the larger the amount of profit allowed. Economists have long recognized that this creates a perverse incentive to over-capitalize—or to not be focused on minimizing the costs of physical infrastructure. Australia, by contrast, uses “light-handed” regulation of its privatized airports, in which there is no explicit regulation of charges or rate of return. Rather, the airports are subject to normal competition laws (antitrust laws in US parlance), and in nearly two decades of operation as commercial airport enterprises, none of the handful of airline complaints has been judged to require government action.

Besides airline concerns over the project’s costs, there will certainly be litigation. Following Parliament’s vote, Greenpeace UK announced that it will participate in the legal challenge planned by a group of London borough councils and Mayor Sadiq Khan. These groups plan to argue that the additional flight activity will breach UK commitments to reduce carbon emissions. The corporatized air traffic control provider NATS has improved airspace procedures in southeast England, generating fuel cost savings of nearly $40 million since 2008 and a concomitant reduction in CO2 per flight of 6.4%. But that won’t appease the opponents.

Nonetheless, I find it hard to believe that Heathrow expansion would have serious negative environmental consequences. Major expansions have taken place and are continuing at Charles de Gaulle Airport in Paris and at Germany’s largest hub airport, Frankfurt.  France and Germany face the same overall European environmental constraints and goals as the U.K., yet those expansions overcame environmental and NIMBY oppositions. My impression from reading anti-airport/anti-air-travel screeds from UK environmental groups is that they are far more radical than their counterparts on the continent. So we can expect this battle to go on for quite some time.

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Airports Council Defends Privatization in New Report

With some airline officials in Europe still taking pot-shots at airport privatization, Airports Council International, at its World General Assembly in Brussels last month, introduced a hefty report. Weighing in at 45 pages, “Policy Brief: Creating Fertile Grounds for Private Investment in Airports” was produced for ACI by Intervistas Consulting.

The thrust of ACI’s case, presented in the report, is that with global air traffic expected to double by 2033, significant airport investment will be needed. And there is a large gap between currently planned capital investment and what will be needed to meet the demand. Intervistas analyzed ACI data and found that in the 2012-2016 period, airports with private-sector participation averaged 14% more capital investment than airports managed by the public sector. They also documented that airport privatization continues to grow. Of the 100 busiest airports, 51% had private-sector participation as of 2017, compared with 46% in 2016. And the share of passenger traffic at all airports with private-sector participation increased from 41% in 2016 to 43% in 2017. Here is a summary of which regions have what share of private-sector participation in airports:

Region Percent Private-Sector Participation
Africa 11%
Asia-Pacific 47%
Europe 75%
Latin America/Caribbean 66%
Middle East 18%
North America   1%
World 43%

The report goes on to explain the three principal modes of build-operate-transfer (BOT) concessions, trade sales/leases, and management contracts. These are illustrated by a set of case studies, spanning types of private involvement, geographical region, and airport size, in each case with specifics on before/after traffic, capital expenditure, and regulatory framework. It also provides a detailed set of ACI policy recommendations on privatization.

At about the same time as the ACI meeting, the French government announced its plan to privatize the government’s remaining share-holding in Groupe ADP, the company that owns and operates the three Paris airports and holds concessions and management contracts at airports worldwide. As of now, the government retains 50.6% of ADP. The comprehensive growth and transformation bill (PACTE, introduced on June 18th by Finance Minister Bruno LeMaire), aims to deregulate, encourage foreign investment in France, and sell all or part of ADP, Engie SA, the lottery company, and portions of state railway SNCF.

As expected, the ADP proposal is to divest all 50.6%, valued at €8.8 billion, via a 70-year concession. Nearly everything in the PACTE will require enactment by Parliament, which is not expected until next year and could lead to changes. Also, conditions attached to the ADP privatization might dampen investor enthusiasm, notes David Bentley, chief airports analyst for CAPA-Centre for Aviation. In addition to retaining a “golden share” giving the government certain powers to intervene, a new regulatory agreement would be negotiated every five years, creating revenue risk. The government could also “impose strategic investments which the concessionaire would be forced to make.” He also wonders what importance will be given to ADP’s extensive investments in foreign airports. And this is before any tinkering that Parliament might do prior to approving part or all of PACTE. Given all these factors, Bentley wonders whether investors will actually bid for the ADP shares.

Still, if the ADP privatization goes through, it will add Paris to the major European cities whose airports are now in largely private hands, including Athens, Brussels, Budapest, Copenhagen, Frankfurt, Lisbon, Madrid, Vienna, and Zürich. Increasingly, airports are being recognized as businesses. It’s time for airlines to get with the program.

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Atlanta’s Hartsfield-Jackson Airport Governance Under Fire

Serious questions are being raised about corruption in the management of the Atlanta airport, ranked as the world’s busiest. Local news media in May broke a story revealing that former Mayor Kasim Reed in 2016 withheld from the public a “potentially explosive federal subpoena,” thereby concealing large-scale corruption from the public and the City Council. And that, in turn, led to the award by the Council of four multi-million-dollar airport contracts—which were part of the federal investigation. In addition, keeping voters unaware of the corruption in airport contracts shielded the campaign of Reed’s chosen successor, Keisha Bottoms, from questions about support she was receiving from airport contractors. And before leaving office, Reed arranged for two of his assistants to get high-paying jobs at the airport.

There’s a great deal more online, thanks to the diligent reporting of Kelly Yamanouchi and colleagues at the Atlanta Journal-Constitution. Just one more tidbit. Former airport General Manager Miguel Southwell, whom I met when he was at Miami International, was fired by Reed several years ago, after objecting to political interference in airport contracts. His attorney in ongoing litigation quotes Reed as telling Southwell, prior to his firing, “You worked in Miami. I thought you know how things worked,” which Parks says “could only be interpreted as a blunt reference to Miami International Airport’s long and difficult history of patronage-based awards.”

Some good news is emerging from this muck. The Georgia Senate has created a study committee to look into changing the airport’s governance, by creating a regional airport authority. On June 20th, Lt. Gov. Casey Cagle appointed members to that committee. And two days later the new chair of the committee, Sen. Burt Jones, announced that in addition to considering an airport authority, the committee will also “consider the possibility of adding a secondary hub [airport] modeling other states with the same population density as Georgia.”

As I have written before, there is empirical evidence that an airport authority is a more efficient and economically productive governance model than direct operation by a city government. The most definitive study on airport governance models is “Ownership Forms Matter for Airport Efficiency,” by Tae Oum and two co-authors, published in the Journal of Urban Economics in 2008. Using a dataset of 109 airports with four different governance models worldwide, they found that airports operated as investor-owned businesses, government corporations, and airport authorities are more productive than average, and those owned by multi-purpose port authorities are the least productive, probably because they often serve as cash cows for their non-airport functions. So the Senate committee is on the right track in considering an airport authority.

I would go further, if asked, in suggesting that privatization under the FAA’s Airport Privatization Pilot Program would better insulate ATL from politics, but there is one current problem with that alternative. Under the restrictive ground rules of the Pilot Program, any long-term lease program must receive the approval of airlines representing at least 65% of the annual landed weight at the airport. Since Delta carries nearly 75% of all ATL passengers and seems opposed to changing the airport’s governance (let alone privatization), there is no chance that privatization would succeed. So unless and until Congress reforms the Pilot Program to change the airline approval requirement to a numerical majority of the airlines serving it, the best hope for improved governance at ATL is conversion to an airport authority.

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News Notes

$20 Billion Proposal to Rebuild Newark Airport. The Regional Plan Association last month proposed a plan to basically tear down the existing Newark International Airport (EWR)—over the next four decades. The plan calls for replacing the existing terminals, one by one, and eventually adding a third runway. These changes are much-needed since the terminals are sub-standard and the airport lacks adequate runway capacity; EWR has among the country’s worst figures for on-time flights and cancellations. The airport’s operator—the Port Authority of New York & New Jersey—could speed up this 40-year process by leasing EWR under the FAA’s Airport Privatization Pilot Program. The PA has already used public-private partnerships for new terminals at JFK and LaGuardia, as well as for the replacement of the aging Goethals Bridge. A long-term PPP lease is what the Pilot Program calls for.

Japan Privatizes Fukuoka Airport. Continuing its ongoing airport privatization program, the Japanese government has announced the winning bidder for a 30-year concession of the country’s fourth-busiest airport, Fukuoka. The consortium is led by Changi Airport (Singapore) and Mitsubishi Corporation. At about the same time, the Ministry of Land, Infrastructure, Transportation & Tourism issued guidelines for privatization of seven airports on Hokkaido, Japan’s northern island.

TSA Will Keep Non-Qualified Travelers Out of PreCheck Lanes. Responding to congressional concerns, TSA announced in mid-May that it will stop allowing travelers not enrolled in PreCheck or Global Entry to use the dedicated PreCheck lanes. Instead, those travelers judged lower-risk will receive “modified” screening in regular lanes. It’s unclear what that modified process will be, and TSA may not have figured this out yet, since it only promises to have the new policy fully implemented by 2020.

St. Louis Approves Airport Privatization Consultants. A team consisting of Moelis & Co., McKenna & Associates, and Grow Missouri, Inc. has been approved by the Board of Estimate and Apportionment to assess the desirability of leasing St. Louis Lambert Field to a private operator under the FAA’s Airport Privatization Pilot Program. Moelis will be the financial advisor, McKenna will identify qualified operators, and Grow Missouri will support and pay for the evaluation process. Assuming the findings are favorable, the next step will be issuing a Request for Qualifications to potential operators. St. Louis holds a slot in the Pilot Program. If the long-term public-private partnership goes through, STL would be the largest airport in the Pilot Program.

TSA Seeks Canine Contractors. In late May, TSA began seeking applications from companies qualified to certify cargo-screening third-party canine teams. The agency says it will continue to operate its own canine teams but will meet increased demand via contracting out the service.

More On-Airport Hotels Are in the Works. In a recent “Middle Seat” column, the Wall Street Journal’s Scott McCartney reported a boom in construction of airport hotels. Projects underway include the TWA Hotel featuring the iconic TWA terminal at JFK, a new InterContinental hotel opening this month at Minneapolis/St. Paul (MSP), a Grand Hyatt adjacent to Terminal 2 at San Francisco (SFO), and an InterContinental adjacent to the terminal at Hartsfield Atlanta (ATL). In addition, plans for major terminal expansion at Chicago O’Hare (ORD) include a new hotel adjacent to the international terminal. Not counting these new projects, McCartney reported that 14 hotels currently operate on airports, including Dallas-Ft. Worth, O’Hare, Detroit Metro, Orlando, and Tampa.

Porter Airlines Keeping Its Order for Jets. Robert DeLuce, the CEO of Canada’s Porter Airlines, told a reporter in May that the airline is keeping in place its order for 30 C-Series jets from Bombardier, despite not having won permission to operate them from its Toronto base at Billy Bishop Airport. The Liberal federal government elected in 2015 announced that it would not re-open the agreement among Transport Canada, the City of Toronto, and the Toronto Port Authority, which would be required to remove the current ban on jets at Billy Bishop. The jets would require a somewhat longer runway, to which there is local opposition.

Paine Field Airline Service May Be Delayed. The FAA has indicated a likely delay in the planned autumn 2018 start of airline service at Paine Field north of Seattle. Airport Director Arif Ghouse told the Seattle Times that he now expects that service to begin in January. The announced level of service by Alaska, Southwest, and United is significantly more than in FAA’s previous review of noise impacts and ground traffic, so the agency is conducting a supplemental review, which could take 6 to 18 months. FAA will release its preliminary findings for a 30-day public review and comment period, before finalizing the review.

LAX Rental Car Project RFP Released. Los Angeles World Airports has released the RFP for its Consolidated Rent-a-Car (ConRAC) facility to the four short-listed teams it had previously selected. They are headed by Meridiam/Skanska, Fengate Capital Management, ACS/AECOM, and Plenary Group. The DBFOM project will have a 28-year term; it includes the new facility, connections to shuttles and local transit, and information kiosks. The estimated construction cost is $850 million to $1 billion.

Privately Run JFK Terminal Doing Well. A private consortium (JFKIAT) financed, built, and began operating a new Terminal 4 at Kennedy International Airport in New York in 2001. Its original mix of airlines was a large array of global carriers, with no domestic ones. But as JFK air traffic continued to increase, Delta approached the operator, Schiphol Group, and negotiated an expansion of T4, which added 11 gates for Delta in 2015. With other changes in carriers, as of 2018 Delta has become T4’s anchor tenant. Carriers that left have been replaced with new tenants, including WestJet, Thomas Cook Airlines, Volaris, and more recently Hainan Airlines and Xiamen Airlines. T4 handled 21 million passengers in 2017.

AirTrain Project Under Way for LaGuardia. Under an agreement between the Port Authority of New York & New Jersey, the Metropolitan Transportation Authority, and the State of New York, the long-discussed $1.5 billion Air Train project to link Manhattan to LGA appears to be getting underway. The current plan calls for it to be operational by 2022. The target travel time from Manhattan to LGA is 30 minutes. Unlike nonstop express trains (Heathrow Express and similar express trains in Stockholm and Vienna), the LGA AirTrain’s new construction will be just a short link from the airport to the Willetts Point station of the Long Island Rail Road. That journey is expected to take 6 minutes. From there, travelers will transfer to existing LIRR trains to either Grand Central or Penn Station, estimated as a 16-minute trip.

FAA Bills Offer Minor Tweak to PFC Use. Neither the House nor the Senate bills to reauthorize the FAA make any change to the existing federal ceiling of $4.50 for airport-levied passenger facility charges (PFCs).  But the House bill does reduce restrictions on how airports can spend the revenues raised from PFCs, especially as applied to large and medium-hub airports, which have the largest average capital project needs.

Dallas Implements GA Landing Fee at Love Field. Effective July 1st, private (general aviation) aircraft landing at Dallas Love Field (DAL) will have to pay landing fees. The fee must take into account DAL’s costs attributable to general aviation and the aircraft’s weight. In 2016, GA accounted for 38% of operations at the airport.

Excellent Overview of Transportation Deregulation. In “The Unfinished Business of Transportation Deregulation,” economist Dorothy Robyn focuses mostly on airline deregulation and its impact on largely un-reformed airports and air traffic control. There is also a section on surface transportation, where both railroads and trucking were deregulated. Robyn was a White House infrastructure specialist during the Clinton administration and has done other work on aviation policy for the Brattle Group and the Brookings Institution. Her article appears in the May/June 2018 issue of TR News, the magazine of the Transportation Research Board.

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Quotable Quotes

“The big three U.S. airlines are now in a worse place than they were before they started their campaign [against the Gulf carriers] in 2013, because the exact same deal was confirmed even after intense scrutiny. . . . The U.S. carriers picked the wrong tactic and the wrong targets. . . . Subsidies in international air transport are of course distorting competition. Many airlines are at least partially state-owned and receive government support where needed. Even when they are mostly privately owned (as in Europe), governments are extremely creative in getting around state support rules. All Chinese carriers are essentially owned (and financed, where needed) by either the central government or a provincial one. South African Airways just received another bailout of $400 million from taxpayers . . . . Of course, Qatar Airways and Etihad have benefited from massive financial support from their [government] shareholders. . . . In their campaign, American, Delta, and United picked on the carriers that seemed to bother them the most, while ignoring state support for their allies, including carriers such as China Eastern, in which Delta owns a stake. That’s a hypocritical way to approach the issue.”
—Jens Flottau, “Airline Intel,” Aviation Week, May 21-June 3, 2018

“Airports today are operating in an evolving environment; although passenger volumes are soaring, today’s fliers are increasingly cautious about their spending when in the terminal. What’s more, a higher volume of passengers using low-cost carriers (LCCs) could mean higher parking and food/beverage revenues—but it also means discounted aeronautical charges and diminished appetite for higher-priced duty-free and luxury goods. . . . Although their margins are stable for now, airports will need to reinforce their competitive positions. In our view, it will be those airports with strong competitive positions (characterized by a diverse airline base, full capacities, supportive regulatory frameworks, and a lack of environmental or social constraints) that will soar.”
—Mar Beltran, S&P Global Ratings, “Airport Operators Should Prepare for Retail and Mobility Disruption,” Airport Business, May 2018

“It is clear that slots are now on the agenda. . . . First, speaking to the European Aviation Club in Brussels, DG MOVE’s Henrick Hololei noted that the slot regime as currently structured does not encourage the efficient use of scarce capacity, does not encourage competition, and blocks new entrants. He would like to modernize and improve the rules to incentivize secondary trading. He noted that ‘some operators are actually quite happy with the present situation that guarantees them slots through grandfathering, and there is little incentive to change and open up to new entrants and thus increase competition.’ Three days later, speaking in Mexico City, the DG of ACI World, Angela Gittens, added her voice, cautiously, tentatively, to calls for revisions to the slot rules. Mexico is currently proposing new slot regulations. She suggested ‘a wider discussion on alternative methods for allocating slots.’ Furthermore, she said that airports, airlines, and airport coordinators should play an equal role in the efficient allocation of slots. In fact, you might be shocked to learn that ACI thinks that ‘airport operators themselves are best-placed to define airport capacity in the interest of the passengers and the communities they serve.’ Game on.”
—Andrew Charlton, “Clarifying IATA’s Slot in Slot Regulations, However They Develop,” Aviation Intelligence Reporter, April 2018

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