In this issue:
- TSA launches private-sector PreCheck recruitment
- Air fares, deregulation, and airline consolidation
- How cost-effective is PreCheck?
- Wright Amendment repeal causes Love Field snafu
- Will airports succeed in raising the PFC cap?
- Will London get more airport capacity?
- Upcoming Event
- News Notes
- Quotable Quotes
TSA Launches Private-Sector PreCheck Recruitment
Speaking at a luncheon of the Aero Club of Washington on Sept. 26th, TSA Administrator John Pistole announced long-awaited plans to contract with private companies for large-scale marketing to and vetting of potential PreCheck members. As he announced then, the agency followed up with an Industry Day on Oct. 7th, with 91 industry people in attendance.
While PreCheck now has nearly 600,000 members, the new effort is aimed at adding millions of low-risk travelers to the program. Factoring in membership in Customs & Border Protection’s trusted traveler programs, who gain access to PreCheck lanes, as well as the exemptions for airline crew-members and military personnel, TSA now estimates that half of daily air travelers can bypass regular screening lanes. The program shortens all the screening lines and enables TSA to focus more resources on travelers who have not been pre-vetted as low-risk.
But to increase PreCheck to millions rather than 600,000, the current “retail” recruitment effort aimed at individual travelers is insufficient. Most of its recruiting locations are at places inconvenient for air travelers (such as seaports where other transportation security efforts are located). The idea behind the new large-scale recruitment is to tap private-sector expertise to market the program on a wholesale basis, to employees of larger businesses, trade associations, and other groups. Here is how TSA expects it to work, based on the PowerPoint from their Industry Day meeting.
Qualified companies (which must meet a detailed set of TSA requirements) will be asked to submit detailed proposals to market to, enroll, and pre-screen large numbers of individuals, with TSA making the final eligibility decision. The selection of contractors will proceed in three phases. First, TSA will receive and evaluate proposals from companies that meet a set of requirements. Next, for those that pass muster, TSA will assess the algorithms they plan to use to validate applicants’ identity, check their criminal histories for disqualifying events, and perform provisional risk assessments on the applicants. In phase three, TSA will perform end-to-end testing of the company’s infrastructure and enrollment methods.
One sticking point for some would-be contractors is a planned requirement to collect fingerprint data, which can only be done in person. The ease of applying entirely online would likely attract far more applicants than a process that requires making an appointment and showing up to be fingerprinted. The president of likely bidder Eid Passport, James Robell, told the Wall Street Journal‘s Scott McCartney that the potential market could be 10 million without the fingerprint requirement, but only 10% of that with fingerprinting. Robell said that industry has developed other ways to validate identity without using biometrics. I’ve also been told that it is possible to do criminal history checks without having a person’s fingerprints.
Some other details from the TSA presentation are that applicants will be expected to pay a fee sufficient to cover TSA’s processing costs, presumably the same $85 fee for the current recruitment program aimed at individuals (and which does require fingerprinting). Also, TSA stresses that while companies will be free to use commercial databases in their pre-screening, risk assessments may not be based on race, ethnicity, religion, national origin, age, financial status (e.g. credit scores, bankruptcies, or income level), health records, constitutionally protected political activity, or other factors reflecting socio-economic status. For those applicants deemed ineligible as a result of the criminal history check, the contractor must notify the person and provide information on how to apply for redress.
TSA told attendees that they will take questions and feedback through the end of October. The Request for Proposals will be released in late November, with proposals due a month later and contract awards in early February. That’s more than two years since the agency first began talking with companies like these in January 2013.
Air Fares, Deregulation, and Airline Mergers
Believe it or not, there are still people who think it was a mistake to get the government out of deciding which airlines can fly where, and what they can charge. This is despite the dramatic long-term decrease in inflation-adjusted air fares following the Airline Deregulation Act of 1978. That measure, which eventually led to the demise of the Civil Aeronautics Board, ushered in the democratization of air travel, making flying affordable to nearly the entire U.S. population.
Some defenders of regulation may agree with that assessment as being true of the first two decades or so of deregulated air travel, when scores of new entrants tried their hand at providing scheduled service and some incumbents expanded willy-nilly (e.g., Braniff), offering a proliferation of air travel choices across the country. But what of the past 15 years, they will say. Many legacy airlines could not survive a competitive environment and went belly-up-including such storied names as Eastern, National, Pan American, and TWA. Critics’ voices have grown louder in the past decade of mergers, which saw Southwest acquire AirTran, Delta acquire Northwest, Continental and United merge, and most recently American and US Airways merge. What has all that consolidation done to competition-and hence air fares?
I’m happy to report that thus far there has been no significant resurgence of air fares. Aviation Daily in August published a set of tables reporting inflation-adjusted air fares from 1995 through 2014. If you plot the average 1st-quarter air fares for each year of that 20-year period, you will see a steady downward trend, though marked by occasional upward spikes. For 1995, the average was $463, with the lowest fare in this series being $349 in 2009. There has been a slight up-trend since then, with a leveling off in 2013 and 2014 at around $382-still substantially lower than the $463 of 1995.
Another table listed the change in air fares between 2000 and 2014 for each of the top 100 airports. Over this time period-the consolidation of legacy carriers-only 16 airports had an increase in their average fare, and these were mostly smaller airports, often dominated by Southwest (Dallas Love, Houston Hobby, Chicago Midway, Burbank, etc.). The 15-year increase among these 16 ranged from a low of 0.3% (Kansas City) to a high of 28.9% (Dallas Love). Among the 84 airports whose air fares decreased during this 15-year period, two had decreases in the 50% range, six had decreases in the 40% range, and 14 had decreases of 30-39%.
I’m sure number-crunchers could do a lot more with these data than I’ve done here. But clearly there is no sign that airline consolidation has led to significant increases in air fares. Competition still appears to be alive and well in U.S. aviation.
How Cost-Effective Is PreCheck?
Last May I took part in a two-day aviation security conference held at Laurier University in Toronto. One of the most impressive presentations was made by Prof. John Mueller of Ohio State University. He and co-author Mark Stewart, whose work I’ve cited previously in this newsletter, had produced a new assessment of the cost-effectiveness of TSA aviation security policy, this one including an analysis of the agency’s PreCheck program.
The presentation in May was based on a preliminary version of a paper that has subsequently been revised and submitted for publication in a forthcoming special issue of the Journal of Air Transport Management. What I’m giving you here is a preview of this important paper, “Responsible Policy Analysis in Aviation Security, with an Evaluation of PreCheck.”
Before getting into their work on PreCheck, Stewart and Mueller provide what amounts to a primer on aviation security risk analysis, including very useful data on the cost per life saved for a large number of federal safety regulations (for context), and an assessment of what levels of risk are generally considered acceptable in other areas of life. They show how to apply cost-benefit analysis to aviation security and review some of their prior research that found some security measures (such as strengthened cockpit doors and armed pilots) to be cost-effective and others (such as Federal Air Marshals) to be decidedly not cost-effective.
The core of the paper is their application of this methodology to PreCheck. Their basic analysis begins with the current information that PreCheck lanes are available to 50% of daily passengers. They compare the current situation of PreCheck to the situation before its implementation, making defensible assumptions about the program’s accuracy in identifying and shifting low-risk passengers to the expedited lanes. They find that this change leads to only a tiny difference in the overall effectiveness of airport screening (either plus or minus depending on assumptions) but produces large co-benefits in terms of passenger time savings and increased airline revenue, estimated to be worth $2 billion a year with 50% of daily passengers using PreCheck lanes, vastly exceeding a worst-case cost of $50 million a year if screening effectiveness is slightly reduced. And there is a plausible case that overall screening effectiveness will be increased, as TSA focuses more resources on the non-low-risk passengers in the regular lanes.
The Cato Institute has published a version of the basic paper, minus the PreCheck analysis, but including a no-equations version of the risk assessment and cost-benefit principles. It includes tables on regulatory expenditures per life saved and comparisons of annual fatality risks that put aviation security risks in perspective. (See Quotable Quotes in this issue for a citation of that paper.)
Wright Amendment Repeal Creates Love Field Snafu
Eight years ago the key stakeholders involved in the federal regulation that limited Dallas Love Field air service to flights to adjacent states (the Wright Amendment) reached agreement on phasing out that anti-competition measure. American, Southwest, DFW Airport, and the cities of Dallas and Fort Worth all agreed that the restrictions would be phased out over eight years, ending this month. But in exchange, the number of gates at Love Field would be slashed, from 32 to 20, and international service would be banned. Those provisions are included in the federal statute that phased out the Wright Amendment-and going forward, they will continue to thwart meaningful competition at the airport.
Of the 20 gates, 16 are leased to Southwest on an exclusive-use basis. Two formerly held by American were divested, per the Justice Department’s antitrust conditions on the American/US Airways merger, to Virgin America. And United, which had subleased one of its gates to Delta, has decided to expand at Love Field and has asked the City of Dallas to kick Delta out, which the City has done. Delta has cried foul, accusing United of hogging its gates, citing UA’s planned tripling-from 30 minutes to 90 minutes-of the turnaround time on its flights to and from its Houston (IAH) hub.
Clearly, the City of Dallas is sitting on a valuable asset, for which demand is greater than its current 20-gate capacity. A rational airport owner would add gates and seek authorization to add international service facilities as part of that expansion, just as Houston has done with Southwest’s base at Hobby Airport. But with the current five-party agreement enshrined in federal statute, is there any hope of changing this ridiculous status quo?
Mitchell Schnurman, business columnist for the Dallas Morning News, suggested to me that the original purpose of the Wright Amendment-to protect the fledgling DFW Airport from local competition-became an anachronism and that the five-party settlement remains one, due to DFW’s continued growth and success. American is fat and happy as the dominant carrier at DFW. So might those two key stakeholders support eliminating the successor restrictions on Love Field? Were such an effort to get under way, nearly everyone assumes that Southwest-in the catbird seat at Love Field-would lobby fiercely to retain the 20-gate status quo.
I’m not so sure that’s the case. Think back to what happened at Houston Hobby (HOU) in 2012. Southwest engaged in a major lobbying battle to remove the ban on international flights at Hobby, over the fierce objections of United, which fought to protect its international service at Houston Intercontinental. But ultimately the City of Houston decided in favor of international service at HOU, and the new international terminal is now under construction. Southwest has ambitious plans to serve cities in Mexico and elsewhere from HOU. They might decide that comparable service out of Love Field makes equally good sense.
With an international terminal at Love Field as the carrot, and DFW and American not opposed, Southwest could decide in favor of scrapping the current restrictions at Love Field-and presumably the two cities would then go along. But if any such deal materializes, all new gates added at Love should be common-use gates, offering the maximum opportunity for competition. And as existing exclusive-use leases expire, the city should convert them to common-use, as well.
Will Airports Succeed in Raising the PFC Cap?
With next year bringing a new FAA reauthorization bill, airport groups ACI-NA and AAAE are revving up a renewed campaign to increase the federal cap on what airports can charge passengers for local airport capital improvements. This local fee is called a passenger facility charge (PFC). Until 1990, airports were not allowed to levy such fees, due to a federal statute called the Anti-Head Tax law. But in that year Congress overcame intense airline lobbying to allow airports to impose up to $3 per passengers for specific capital improvement projects, both airside (runways, taxiways, etc.) and landside (terminals and security facilities, mostly). The money can be spent only on projects approved by the FAA.
Congress increased the cap to $4.50 per passenger in 2000, but if you use the Engineering News-Record construction cost index to assess the PFC’s purchasing power, by next year it would need to be about $8.50 to buy as much as it did in 2000, according to ACI-NA. So the airport groups are pushing for an increase in the cap to $8.50, with inflation indexing going forward from there.
Airlines continue to oppose PFCs, despite acknowledging the need for investment in airport infrastructure. They say they would rather pay for such costs via increases in the landing fees and space rentals they pay to airports. They also argue that any increase in per-passenger charges will depress the demand for air travel-though that hasn’t stopped airlines in recent years from imposing a wide array of mandatory and optional “ancillary charges” that add to total ticket prices but escape the 7.5% airline ticket tax because they are not an official part of the fare.
The airport groups hope to succeed by debunking airline characterization of an increase in the federal cap on PFCs as “a federal tax increase.” That’s a gross distortion of reality, since the federal government does not levy or collect PFCs. And airports select the amount of their individual PFC based on the financing plan they have worked out for a given set of airside and landside capital investments. (Note: the PFC revenue stream is bondable, making it a powerful financing tool.)
There is a separate program of federal grants for airports: the Airport Improvement Program (AIP). Its future is somewhat uncertain, given the eight more years of the federal budget sequester still to come. Last year saw the funds to reverse air traffic controller furloughs and re-open contract towers diverted from the AIP budget, and with the likely shrinkage of general fund support for FAA’s budget (in recent years, between 20 and 30% of the total), further reductions in AIP are likely. Moreover, like all federal grant programs, AIP imposes numerous conditions and restrictions on airports.
So it would make sense, both for airports and for Congress, to transition airports from dependence on federal grants to more-robust local funding. Greater use of PFCs would be a powerful way to do that. Several years ago, a majority of the 29 U.S. large-hub airports offered to give up their AIP grants in exchange for removal of the federal cap on their PFCs. An April 2013 letter to the House and Senate budget committees from the operators of 20 of those airports estimated that this expanded local self-help would reduce AIP spending by $4.2 billion over 10 years.
The airport groups are right to talk about PFCs as local self-help–not federal taxes– because that is what PFCs are. But I think they are making a mistake in not appealing to fiscal conservatives and other budget hawks by proposing reductions in AIP (except for non-commercial airports) in exchange. There is growing interest in Congress in selectively reducing the federal role, devolving more responsibility to state and local governments. The case for PFCs could fit right into this emerging trend.
Will London Remain Competitive for Air Service?
Europe has a number of major hub airports today, including Amsterdam, Frankfurt, London, and Paris. Amsterdam has five airline runways and one GA runway, and is expanding its terminal capacity. Frankfurt recently completed its fourth runway, and has received planning permission to add a new Terminal 3. And Charles de Gaulle in Paris has four runways and ample capacity. London Heathrow has only two runways and London Gatwick only one.
Of the four mega-cities, only London has been constrained for several decades by political opposition to adding any runway capacity at either Heathrow or Gatwick. Last year politicians created an independent Airports Commission to take a fresh look at the options, and on Sept 1st it rejected the outlandish ($100-150 billion) proposal to build a replacement for Heathrow in the Thames estuary. Conventional wisdom now expects the Commission to recommend the addition of one runway for either Heathrow or Gatwick by its next-summer deadline, after which the ball will be back in Parliament’s hands.
The conventional wisdom also says that only one airport in Britain can be a major international hub, and that airport must be Heathrow. The assumption here is that airlines would not support two airports in the same urban mega-region with serious international service. But London is not just any urban mega-region. It is comparable in wealth and impact to New York and Tokyo, each of which has two international hub airports-JFK and Newark in one case, Haneda and Narita in the other. It is up to individual airlines to decide whether to build a major hub at only one, or to split their service between two.
Thanks to the recent breakup of the former BAA, Heathrow and Gatwick now have separate ownership, and each seeks to add a runway in order to expand its business. This kind of competition is a positive thing. It will foster innovation in figuring out how to compensate airport neighbors for the land acquisition and noise impacts that accompany runway additions, as well as innovation in each airport’s marketing outreach to airlines. The idea that there is “one best way” for airports to evolve in Britain is a hold-over from the days of central planning, when (in Europe) airlines and airports were state-owned. In today’s deregulated aviation market, with poorly run airlines shrinking or disappearing and new ones unexpectedly emerging into powerhouses (Emirates), aviation central planning is a fool’s errand.
If Heathrow and Gatwick were both given planning permission to add runway capacity, the outcome could be that one or both succeed, needing to absorb the costs of making this expansion tolerable to their neighbors. The future shape of air service to Southeastern England would then be determined by the dozens or hundreds of airlines that would make service decisions in response to the added capacity. Depending on what those airlines decide makes sense for them, the outcome could be a two-international-hub situation like New York and Tokyo or a mega-hub plus secondary airports as in Dallas, Houston, Los Angeles, Miami, Paris, San Francisco, Seoul, Sao Paulo, and Washington, DC.
I don’t have the knowledge or wisdom to define one such outcome as optimal, and neither does the Airports Commission, the Confederation of British Industry, the Airport Operators Association, or the British Parliament.
Note: I don’t have space to list all aviation conferences that might be of interest. Hence, only conferences where someone from Reason Foundation is speaking are listed in this section.
Fourth Annual AAAE/LeighFisher Global Airport Public-Private Partnership Conference, Nov. 5-6, St. Regis Hotel, Washington, DC (Robert Poole speaking). Details at: www.events.aaae.org/sites/14071
Orlando Sanford Switching to Private Screening. TSA has approved the request of Orlando Sanford International Airport to switch from TSA screening to private-sector screening, effective early next year. TSA has selected Trinity Technology Group for a $24 million six-year contract, under the agency’s Screening Partnership Program (SPP). The contractor must offer screening positions to the 200 TSA screeners now working at the airport; those who do not sign up may apply for other government positions or retire. The much larger Orlando International Airport is still studying whether to apply for SPP.
Santa Monica Airport on November Ballot. Voters in Santa Monica, CA face a ballot measure next month that would require a public vote before city officials could shut down or reduce the size of the Santa Monica Municipal Airport. Local aviation businesses, along with AOPA and NBAA, turned in petitions with nearly 16,000 signatures to get the measure onto the ballot. In parallel with this effort, airport tenants and aviation groups in July filed a complaint with the FAA, taking issue with the City’s legal position that it can shut down the airport. Under the terms of FAA grant assurances, an airport’s use cannot be changed during a 20-year period after receipt of a grant, and the last such grant to Santa Monica took place in 2003.
Santiago Airport Bids Delayed. Public Works Financing reports that proposals from the private sector for a 20-year, $700 million concession to double the Santiago, Chile airport’s capacity will now be due November 30th, to give bidders more time to prepare their proposals. At least five teams are expected to bid to build a new 200,000 square meter international terminal and upgrade the domestic terminal. The winner will be the team that offers the government the largest share of net airport revenue.
TSA to Test Electronic ID Checking. A system called Electronic Credential Authorization Technology (E-CAT) will be tested this fall at TSA’s Transportation Systems Integration Facility at Reagan National Airport (DCA). The aim of the system is to speed up and improve the verification of each passenger’s government-issued identification at the beginning of the checkpoint screening process. The $85 million contract was awarded to MorphoTrust.
Third Chicago Airport Project Tests Industry Interest. The long-discussed South Suburban Airport at Peotone, IL moved a step closer to realization last month as Illinois DOT held an “industry day” to explain the project and assess private-sector interest. About 150 people attended the Sept. 23rd event. IDOT in August had issued a Request for Information on the possible development of the airport as a public-private partnership. In June IDOT purchased 288-acre Bult Field, a general aviation airport adjacent to the bulk of the land the agency has acquired in bits and pieces in recent decades. The project has been discussed for nearly 40 years, and the Chicago Tribune editorialized on Aug. 25th that it is time to either build the airport or scrap the project.
New Investment in London Luton Airport. The Luton Borough Council gave planning permission this summer for a $172 million project to expand the privatized airport’s annual passenger capacity from 12 million to 18 million. Luton Airport, in London’s northern exurbs, is owned by Spanish airport operator Aena and investment fund Ardian. It is an important base for low-cost carrier EasyJet, which welcomed the announced expansion.
New Runway Opened at Fort Lauderdale. Newly lengthened runway 10R-28L opened to air traffic on Sept. 17th, replacing a prior general aviation runway (9R-27L) on the south side of the airport. The project was held up for many years over the increased noise impact on residential areas just south of the airport. The final compensation agreement, approved by the FAA, offers market-value buyouts to some homeowners and extensive sound-proofing to others.
House Unanimously Votes to Reduce New TSA Security Fees. Last month the U.S. House of Representatives voted to clarify its intent in having previously approved a change in the structure of TSA security fees. A 2013 budget resolution had replaced the previous $2.50 per segment fee (with a cap of $10 per round trip) with a $5.60 fee per one-way trip. But TSA interpreted multi-segment trips with long layovers as separate trips, each subject to a $5.60 fee. The House bill clarifies congressional intent by spelling out that the $5.60 per one-way trip means a maximum of $11.20 per round trip, regardless of the length of connect time. Left unaddressed by the bill is the diversion of a portion of the revenue to deficit reduction, rather than to the budget for TSA screening.
New Guidebook on Through-the-Fence Operations. The Airport Cooperative Research Program, run by the Transportation Research Board, recently released ACRP Report 114, “Guidebook for Through-the-Fence Operations.” It covers financial, operational, legal, and other issues. It can be downloaded from the TRB website or purchased in hard-copy form. (www.trb.org/main/blurbs/170955.aspx)
“One of the biggest improvements and the biggest area of hope for me is this move to risk-based security. Getting folks through expedited screening because we know who they are is very important, not just for commerce . . . because it makes it easier for us to fly and travel . . . because when we actually are taking the people we know out of the mix, what we’re left with is people we don’t know-and that’s where the threat comes from.”
-Rep. Richard Hudson (R, NC), chairman of the Homeland Security Committee’s Subcommittee on Transportation Security, quoted in Tom Curry, “Hudson Urges TSA to Move Faster on Expedited Screening for Low-Risk Flyers,” Roll Call, Sept. 10, 2014
“DHS decision-makers do not follow a robust risk assessment methodology. If they did, low-cost solutions that are easily deployed and effective would be the first to be implemented, and we do not find that to be the standard. That observation is supported by a committee of the U.S. National Academy of Sciences in a 2010 report. After spending the better part of two years investigating the issue, the committee could not find ‘any DHS risk analysis capabilities and methods’ adequate for supporting the decisions made about spending on terrorism and noted that ‘little effective attention’ was paid to ‘fundamental’ issues. . . . As far as we can tell, the report, which essentially suggests that DHS had spent hundreds of billions of dollars without knowing what it was doing, generated no coverage in the media whatsoever.”
-John Mueller and Mark G. Stewart, “Responsible Counterterrorism Policy,” Policy Analysis No. 755, Cato Institute, September 10, 2014
“One of the things we need to do is reposition what the PFC is. Opponents of the PFC have convinced Congress that it is a tax. ACI-NA has the challenge to make our case to Congress that it is not a tax, but a necessary local user fee. We need to build a coalition that understands the importance that raising the PFC is vital to the economic viability of an airport-that the strong airport is essential to a strong local economy and a generator of jobs. The PFC is also critical to ensuring that airports can handle tomorrow’s air traffic.”
-Kevin Burke, ACI-NA, quoted in Tom Smith, “Burke Makes Progress in First 100 Days at ACI-NA,” Centerlines, March 2014