In this issue:
- Who should pay for airport security?
- New business models for airport-airline relationships
- Stowaways and airport security
- LAX runway study leaves some questions unanswered
- Branson Airport innovates again
- News Notes
- Quotable Quote
Who Should Pay for Airport Security?
U.S. airlines are dismayed that the budget proposal for the Department of Homeland Security includes a $1/passenger increase in the $5 passenger security tax levied each way on each ticket. With the increase, the combined security revenue from airlines and passengers would be $2.15 billion, compared with the $5.8 billion budget for DHS’s Transportation Security Administration.
There are two schools of thought on how security costs such as those of TSA should be paid for. Airlines generally favor the “national defense” rationale, arguing that terrorists represent a threat to the nation and therefore, the costs of security should be paid for by all taxpayers, as is the Department of Defense. The other school of thought reasons that certain sectors of the economy are inherently attractive to terrorists and therefore should be defended against by those who use those sectors. We might call this the “insurance” rationale, since it is analogous to the idea that those who engage in high-risk occupations or build homes on the seashore should pay higher insurance rates due to the nature of their activity.
In researching aviation security for the OECD’s International Transport Forum in 2008-09, I looked into how post-9/11 security had been handled in Canada, the European Union, and the United States-including how it is paid for. Airlines in all three domains made the national defense argument, but the funding situation, I discovered, differed considerably.
In Canada, all federal aviation security measures are paid for by means of an air security fee, currently C$5 to C$16 per passenger each way, depending on the type of flight. Last month, to cover rising security costs, the government announced increases, effective April 1st (of C$2.50 per domestic flight, C$4.37 per trans-border flight, and C$8.91 per international flight). European countries differ from one to another, but the general pattern is that aviation security is the responsibility of each airport, under national government regulation, with most costs covered from airport charges paid by airlines and passengers. Germany has a federal aviation security tax (on tickets) which covers part of the costs, with the balance coming out of airport budgets.
For the United States, my assessment, using FY 2007 budget figures, was that slightly more than 50% of the TSA’s aviation-related security costs were covered by airlines and passengers, with the balance being paid for by general taxpayers. Thus, while Canada and the EU countries pay for airport security largely on the insurance model, the United States is about a 50/50 split between the insurance and national defense models.
While I can see merit in both rationales, I’m inclined to favor the insurance model. In high-risk fields that are covered by insurance, high insurance cost provides a powerful incentive for those insured to reduce their premiums by taking action to reduce their risks (e.g., to engage in fire-safety activities to get a better fire insurance rating). On the other hand, where insurance is heavily subsidized by the government (e.g., coastal flood insurance), we see the persistence of high-risk behavior.
The analogy with terrorism risk is not perfect, but bear with me on this. We have seen in homeland security a strong tendency for politicians to enact grandiose target-hardening projects without any sort of benefit/cost analysis. The general taxpayer may look askance at this, but the cost per individual taxpayer is still so low as to make it not worthwhile to do anything about it. On the other hand, if airlines and passengers are the ones required to pay for aviation security, they will have a much stronger incentive to demand better justification, to highlight obvious wastes of money, to take various risk-reduction actions, etc. So I come down on the side of the insurance model when it comes to sector-specific security measures.
However, there is no reason for aviation to be uniquely singled out. To the extent that TSA (or other parts of DHS) engages in significant programs in port security, freight rail security, or urban transit security, those modes should likewise be paying for those measures. The other thing we should insist on is transparency, to ensure that what is collected from aviation does not exceed what is being spent on aviation security.
Airports and Airlines Testing New Business Models
In a recession, how do non-major airports attract and keep airline service on desirable routes? Various airports are engaging in fee waivers, break-even guarantees, bulk ticket purchases, and even outright cash payments to add or keep services.
The most traditional approach is to waive various fees and charges for new service, at least for a few years. This lets an airline test the market at a lower operating cost. That approach is working for Grand Rapids, MI. The airport has landed new routes from AirTran to BWI, Fort Myers, Orlando, and Tampa in exchange for waiving landing and apron fees for one year. In addition, a local booster group-Regional Air Alliance of Western Michigan-is providing the airline with additional incentives, according to Aviation Daily (Feb. 2, 2010). Another new entrant at Grand Rapids is fast-growing Allegiant Air, which recently announced that it will establish a new base at the airport to serve its 34 weekly flights, all begun since 2005 and the start of the incentive program (in the wake of American Trans Air’s demise).
The brand new Northwest Florida Beaches Airport, in Panama City, opening this spring, has landed Southwest Airlines, thanks to a “strategic alliance” with major local landowner St. Joe Company (which donated the land for the new airport). Under the deal, St. Joe has agreed to make quarterly payments, if necessary, to ensure that the new service (to BWI, Houston, Nashville, and Orlando) at least breaks even during its first three years.
More elaborate are deals AirTran has reached with two Mississippi casino cities, Biloxi and Tunica. In both cases, a company called Aviation Advantage is serving as a middle-man between the airline and several major hotel/casinos. The hotels are buying blocks of space on the AirTran flights from Aviation Advantage, and that company is paying the airline a fixed amount for operating the service (including payments for higher fuel costs above a specified level). Aviation Advantage is selling other seats on those flights as charters, and AirTran itself is selling the rest.
Several much larger airports are also getting into the game. Portland (OR) and Pittsburgh have both lost international routes that local businesses consider critically important. The latter has made a deal with Delta to launch service to Paris, waiving landing charges for two years and adding $300,000 in marketing funds. Portland has announced that it will pay Delta $3.5 million to maintain its daily nonstop flight to Tokyo, the city’s only direct service to Asia. FAA regulations prohibit direct payments to airlines, so the Port of Portland (which operates the airport) is using non-airport monies for the Delta deal.
It’s not clear to me that these deals all make economic sense, but it will be interesting to see how they turn out.
Stowaway Highlights Security Problems
Early last month, when a Delta 777 from Kennedy Airport Tokyo arrived at Tokyo’s Narita Airport, the body of a stowaway was found in one of its landing gear wells. The incident immediately raised concerns about security at JFK. “If a stowaway can get into the aircraft, wherever that occurred, that says a lot about security procedures of that area and the maintenance inspection procedures there,” Richard Bloom of Embry-Riddle Aeronautical University told Business Week.
Although an investigation was launched, I’ve seen nothing further on this case since the original Feb. 9th reports. A breach occurred either with the airport’s perimeter security (controlling access to the airfield from outside) or with the terminal’s access control system (which is supposed to admit only authorized, badged airline and airport people onto the ramp). Retired 777 pilot Vaughn Cordle told Business Week that the pilot’s normal pre-flight inspection for an international trip could take place up to two hours before departure, and that it is highly unlikely that a stowaway would have been mised during that inspection. That means he probably climbed into the wheel well after the inspection took place. And as Bloom pointed out, “If you can do it with a body, you could do it with explosives.”
Last summer Homeland Security Newswire published a thoughtful article on the fragmented responsibility for airport security. Noting that it had highlighted the same concerns 18 months previously, it pointed out that passenger and baggage screening, access control, and perimeter security are “all handled by different federal, regional, and local agencies.” Perimeter security, for example, “falls under TSA oversight, but it is largely left to local agencies, such as the local port police department.” The Port Authority of New York and New Jersey is to be commended for the high-tech perimeter security system whose installation is under way by Raytheon.
But the problem of fragmented airport security will not be solved by technology alone. Congress created this problem when it hastily created the TSA two months after the 9/11 attacks, giving TSA security regulatory oversight of airports but also requiring it to be the direct provider of (only) one portion of airport security-passenger and bag screening. In Europe, by contrast, in most countries the airport itself is responsible for all aspects of security. The national government sets and enforces the basic requirements, and the airports carry them out. That kind of system is far more likely to produce an integrated approach to airport security.
LAX Runway Study: Safety, Capacity, and Dollars
Los Angeles International Airport (LAX) used to be known as a site with a relatively high degree of “runway incursions” (incidents of unauthorized aircraft operation on a runway or taxiway, with the potential for collision). The FAA has for years argued that the airport’s configuration of runways and taxiways-two closely spaced parallel runways on the south side and two more on the north side-contributed to the high risk of incursions. Several years ago, LAX completed a costly project that added an additional 100 feet of separation between the two south side runways and added a taxiway between them. The FAA pressed the airport to do likewise on the north side, but because most alternatives for doing that would move the northernmost runway closer to homes and businesses (and some of those would require significant property takes), the north side project has generated fierce opposition.
On Feb. 19, 2010 Los Angeles World Airports, LAX’s owner/operator, released a preliminary report from an academic panel chaired by Dr. Arnold Barnett of MIT. Their report, “Los Angeles International Airport North Airfield Safety Study,” is a very careful and thorough assessment of the safety implications of five possible north runway configurations (including the status quo). They oversaw simulation exercises at NASA-Ames’ FutureFlight Central facility, in which actual pilots and controllers simulated operations with each of the five alternatives, under projected 2020 conditions. The academic team analyzed the results along with data on LAX and peer-airport operations and runway incursions, to estimate the changes in probability of fatalities occurring due to runway incursions, under each alternative.
For context, they noted that major runway incursions have declined by 80% between 2000 and 2009, likely due in part to increased installation and use of technologies such as ASDE-X and Runway Status Lights. Their assessment of the north runways alternatives concluded that each could reduce the collision risk, but that baseline risk (in 2020) will be so small that a fatal collision would occur there once every 200 years, and would account for one death per 150 million passengers. Hence, their main (and unanimous) conclusion was that safety considerations alone do not justify reconfiguring the north runways.
The researchers were not asked to assess the cost-effectiveness of the four non-baseline alternatives, and the only cost estimate I’ve seen was $500 million (but it was unclear which alternative that applied to). The researchers were asked to assess the capacity implications of the alternatives. But they were asked to do this only for 2020 traffic levels-just 10 years from now. Given that LAX has suffered traffic losses during the recession, it’s no surprise that three of the four alternatives could handle projected 2020 traffic. (Eliminating one of the two north runways, however, would have “adverse direct and indirect consequences.”) But here is where a decent benefit/cost analysis would have been helpful. The most ambitious alternative-moving the northernmost runway 340 feet northward-would provide “conspicuous improvement in capacity” and significant delay reductions. It would also be the most costly and contentious, involving property takes.
Overall, I think the safety analysis is first-rate. LAX has ASDE-X in operation, and is expanding its runway safety lights. That should be enough to satisfy the FAA on safety grounds, based on this thorough analysis. But I hope the airline customers of LAX push for a capacity benefit/cost analysis before settling for the status-quo north runways configuration. (http://www.lawa.aero/uploadedFiles/LAX/pdf/LAX%20-%20NASS%20Preliminary%20Report.pdf)
Branson Airport Innovates Again
I continue to be impressed at the way privately-owned Branson (MO) Airport is reinventing the airport business. It reminds me of upstart low-cost-carrier Allegiant Air, which keeps growing and making money from the air travel business, not just from selling seats to passengers.
Anyway, Branson Airport recently landed its third scheduled airline. Frontier has announced plans to serve Denver from Branson, using Embraer 190 jets. Between Frontier’s link to Denver and AirTran’s to Atlanta, Branson will have service to about 100 cities. Sun Country also serves the airport.
But the airport’s newest innovation is creating its own airline and travel agency. Branson AirExpress, the airline, is a division of Flybranson Travel, owned by the airport company. Technically a scheduled charter service, Branson AirExpress will start off with two Embraer ERJ-145 regional jets and crews, leased from ExpressJet. Initial cities served will be Austin, Des Moines, Houston, Shreveport, and Terre Haute, each of which is already a source of tourists to Branson. Branson’s Jeff Bourk points out that the company plans on revenue not just from tickets but from airport services (e.g., rental cars), the travel agency’s hotel bookings and travel packages, and sales of tickets to Branson tourist attractions.
How much of this could other airports do, given the constraints of their FAA grant agreements (which Branson does not have)? Frankly, I don’t know. But given the costly lengths some of them are going to these days (see previous story on Grand Rapids, Biloxi, etc.), I think there may be some lessons others can learn from what Branson is pioneering.
Privatized Mexican Airports Plan Investments
Grupo Aeroportuario de Pacifico (GAP) has received the OK from the Mexican government for capital investments over the next five years at the 12 airports it operates under a long-term concession agreement. The largest investments will be at Guadalajara, Los Cabos, and Puerto Vallarta. The investment plan comes despite recent declines in traffic and net income at GAP airports.
Private Airport May Be Donated to County
The former DHL Wilmington Air Park, the largest privately owned airport in North America, will be donated by DHL to the Clinton County (OH) Port Authority. The airport became surplus after DHL drastically scaled back its US express operations. The port authority hopes to turn the 1,500-acre air park into a business hub. Since some $300 million worth of DHL facilities remain, officials hope to attract a mail sorting hub, along with aviation-related R&D, a possible test site for unmanned aerial vehicles (UAVs), and logistics services companies.
Secondary Cockpit Barriers Under Consideration
Airline pilots for years have lobbied for the installation of secondary barriers to secure the cockpit area during times when the reinforced doors must be opened in flight. RTCA Special Committee 221 has been formed to explore ways of doing this. The committee’s fifth meeting takes place in Washington, DC March 16-17.
Should AMT Waiver for Airport Bonds Be Made Permanent?
The credit crunch initially made it nearly impossible to sell airport bonds. Last year’s recovery in that market was greatly assisted by a provision of the $787 billion stimulus measure that temporarily exempted most airport bonds from the alternative minimum tax (AMT). That reduced the interest rate on those bonds, and made them more attractive to high-bracket bond-buyers. Airports were able to issue (or re-issue) over $8 billion in revenue bonds last year. This year’s top legislative priority of ACI-North America is to make this exemption permanent, and stand-alone legislation to do that has been introduced by Rep. Richard Neal (D, MA ) and Sen. John Kerry (D, MA). Since the airport industry tends to lag behind in economic recoveries, this change could have important near-term as well as longer-term benefits.
Porter Terminal in Toronto Opens This Month
Innovative Porter Airlines (see Issue No. 51, November 2009) is set to open its new $50 million terminal on Toronto Island, adjacent to the city’s downtown, on March 7th. The new facility will offer pre-screening of passengers bound for the United States, just as larger Canadian airports do. Porter currently serves 12 U.S. and Canadian cities, providing the kind of short-haul service some would like done by high-speed rail-but unlike HSR, doing it without any taxpayer subsidies.
BAA Airport Sale Order Overturned-But Not Ended
The U.K. Competition Commission’s 2009 order that BAA sell two of its London airports and one in Scotland has been sent back to that body for reconsideration by the Competition Appeal Tribunal. But rather than reconsider, the Commission announced that it will appeal the ruling to the U.K. Court of Appeal. As a practical matter, that means any sale of Stansted and one of BAA’s Scottish airports will be delayed for about two years-if they happen at all.
Outsourcing Airport Fire Service
Airport Business reports that fire and rescue service at Roanoke (VA) Regional Airport will be outsourced in July to Pro-Tec Fire Services of Green Bay, WI. The company also provides airport fire and rescue service at nearby Lynchburg Regional Airport. It has provided airport fire services for over 30 years and currently serves 11 airports nationwide, the largest of which is Burbank, CA.
“Infrastructure investment is fundamentally different from consumption spending because roads, bridges, sewer systems, airports, etc. create wealth for society over their useful life measured in decades. Stated differently, there is nothing wrong with passing along debt service for facilities that are responsibly financed over their useful life precisely because they create wealth for society over that same period. . . . Everyone involved in infrastructure industries needs to do a better job of shining light on this distinction. It fundamentally argues for adding infrastructure banks to our system of infrastructure grants, so that we can take advantage of capital financing for these capital-intensive systems. Such financing will pass along debt service to future generations; it will also pass along the infrastructure that forms the necessary building blocks of future economic growth.”
–Chip Barclay, President, American Association of Airport Executives, “Investment Is Different,” Aviation Daily, Feb. 17, 2010.
“The only crisis relief measure promoted by the European Commission so far was the waiver to the usage rule for airport slots-which was rather one-sided, exclusively benefiting incumbent airlines and preventing an efficient use of scarce airport capacity. We need more-balanced measures that focus on the long-term competitiveness and viability of the entire European aviation system. This means reviewing existing policies and regulations around three key objectives: reducing regulatory-induced costs, incentivizing air traffic recovery, and addressing looming capacity challenges.”
–Olivier Jankovec, Director General, ACI Europe, “Five Good Questions for Olivier Jankovec,” Aviation Week Airports, Jan. 5, 2010.
“[E]ight years after 9/11, we’re still looking for weapons and not terrorists-because of the obstructionism of the privacy lobby. As long as Secure Flight was stalled, we were all stuck with the old system of sending lists to airlines and living with whatever their creaking computer systems dished up. Most couldn’t separate Sen. Ted Stevens’s wife from the singer formerly known as Cat Stevens (a reported apologist for the fatwa against Salman Rushdie). As the lists grew, and Secure Flight still languished, the blame fell not on the privacy machine, but entirely on the agency that had tried to fix the problem years earlier. As long as Secure Flight was stalled, administering even a small no-fly and selectee list was painfully difficult, and a massive inconvenience for travelers whose names resembled those on the no-fly and selectee lists. TSA took all the blame-thus discrediting both the idea of screening for possible terrorists and an agency that no traveler was much disposed to love in any event. Every time TSA’s reputation took a hit for mismatched names, it became easier for Congress and the privacy groups to say they still didn’t trust the agency to administer a new program.”
–Stewart A. Baker, “Until Next Time: The Privacy Lobby Is Inviting Another Abdulmutallab,” National Review, Jan. 25, 2010.