In this issue:
- Aviation security after 2015
- Time to modernize the Airport Privatization Program
- Fixing TSA’s chronic screening failures
- Amazon may revive Wilmington cargo hub
- Cross-border terminal opens in San Diego
- News Notes
- Quotable Quotes
The just-finished year wrapped up with three serious terrorist incidents-the Metrojet bomb in Egypt, the Paris attacks on entertainment venues, and the mass shootings in San Bernardino. All three have implications for aviation security.
First of all, the latter two attacks remind us that free societies are target-rich environments. The target-hardening approach applied to airports in the wake of 9/11 represents a serious misallocation of resources, given the plethora of non-hardened targets in the rest of society. As The Economist pointed out in its Nov. 14th issue, “TSA . . . has a budget of more than $7 billion a year; it also has access to the most advanced scanning technologies money can buy. Critics say it has not foiled a single terrorist plot or caught a single terrorist in the past decade.”
Moreover, a point that I have made previously in this newsletter is that the very large concentration of passengers in massive checkpoint lines in the non-secure portion of an airport is a ready-made target for someone with a suicide bomb vest, disguised beneath his or her clothing. Such attacks have been carried out in Russia in recent memory, but fortunately not in this country, thus far.
More narrowly, the recent attacks have focused attention on TSA’s gross over-emphasis on passenger screening versus airport employees’ access to secure areas of airports. The Economist points to over 30,000 reports of valuables missing from checked luggage in the four years ending in 2014 as a “clue as to how easy it would be to put a bomb into somebody else’s bag.” In November Belgian authorities removed security clearances of airport employees with past connections to people who’d left the country for Syria. In December the French government revoked the security passes of 70 Paris airport workers whose lockers contained suspect materials. And Egypt’s government announced that it will hire a foreign company to beef up security and employee access at Sharm al-Sheikh Airport. Also, the International Civil Aviation Organization (ICAO) announced that its panel of security experts will review ways to better protect airports from terrorism.
Here at home, insider threats to airports and planes is the focus of bipartisan legislation approved by the Senate Commerce Committee in December. The Airport Security Enhancement and Oversight Act (S.2361) was originated by Sen. John Thune (R, SD) and cosponsored by Sens. Kelly Ayotte (R, NH), Maria Cantwell (D, WA), Ron Johnson (R, WI), Amy Klobuchar (D, MN), and Bill Nelson (D, FL). It would require TSA to update the rules on employee access to secure airport areas, including recurrent vetting of employees with SIDA badges (via the Rap Back service), allowing TSA to have access to additional databases in the Terrorist Identities Datamart Environment (TIDE), and increasing employee screening. It would also authorize both TSA and the DHS Inspector General to do red-team covert testing of access controls at airports. Airports Council International-North America sent out a news release Dec. 14th endorsing the bill.
Another implication of my point about the relative ineffectiveness of target-hardening is that a larger fraction of security resources should be focused on intelligence about terrorist threats. A major shortfall in that regard has been European resistance, on privacy grounds, to using passenger name record (PNR) data to vet flyers entering the EU from elsewhere and flying within the EU, and sharing PNR data with friendly countries such as the United States. The good news on this front is that the European Parliament is finally coming around. On Dec. 10th its Civil Liberties Committee voted 38-19 to approve a PNR deal negotiated among 28 EU governments. When approved, as expected, early in 2016 by the full Parliament, it will require airlines to submit PNR data on all flights entering or leaving the EU to each state’s security agency, as well as allowing countries to require reporting of PNR data on intra-EU flights.
Next issue I will provide an update on airport privatization activities worldwide during 2015. The global trend that began in 1987 with the privatization of the former British Airports Authority has become mainstream just about everywhere in the world-except the United States. Most of the major airports in Europe are now partly or completely investor-owned, as are most major airports in Australia, a growing number in Latin America and the Caribbean, and some important ones in Asia. Despite Congress enacting the federal Airport Privatization Pilot Program in 1996, however, the only U.S. commercial airport in private hands is Luis Munoz Marin International Airport in San Juan. At a recent conference, that airport was praised by an airline that uses it as “our only airport where traffic is up, service is improved, and our charges are down.”
A key question for Congress, as it acts to reauthorize the FAA this year, is whether to modernize the Pilot Program to enable U.S. airport owners, the global airport industry, and financial investors to share in the proven benefits of airport privatization. I recently had a long conversation with Chicago-based attorney John Schmidt about this question. Schmidt represented both the City of Chicago and the government of Puerto Rico in their airport privatization efforts. As a long-time observer of airport privatization and the Pilot Program, he’s given a lot of thought to how difficult the current law makes it for airport owners, airlines, and potential bidders to actually see a clear path to getting an airport privatized. He shared with me a draft proposal for changes that would reduce those obstacles, and I am summarizing it here with his permission. Here are the four changes he suggests.
- Simplify the airline approval process. The current law requires a double-barreled super-majority airline approval for a deal to go forward: 65% of all airlines serving the airport plus the votes of airlines representing 65% of the annual landed weight. Such a provision “is unknown anywhere else in the world.” It was included in the 1996 legislation thanks to airline lobbying, as a poison pill aimed at preventing privatizations from going through. In those days, airlines were all-out opposed to privatization. That has changed in the past two decades, with airlines having supported the San Juan privatization and both attempts to privatize Chicago Midway. Schmidt suggests changing the airline approval requirement to the normal majority-in-interest (those airlines representing at least 50% of traffic) provision of many airport use agreements. He also includes a couple of alternatives.
- Allow partial airport privatization. In much of Europe (e.g., France, Spain, Portugal), governments have sold partial interests in their airports, retaining either majority or minority stakes. Allowing this here might make many city and county governments more comfortable with privatization. A possible variant would be to have some or all of the airport sponsor’s retained stake transferred to a public employee pension fund. Globally, such pension funds are increasingly investing in privatized airports as an important diversification of their portfolios.
- Eliminate the numerical limit on airport privatizations. The current Pilot Program has two such limitations: only 10 airports can be privatized, and only one can be in the large hub category. Neither restriction exists in any other country. Removing these limits would send a positive signal to investors.
- Allow use of tax-exempt bonds for a privatized airport. A major drawback to U.S. airport privatization is the U.S. tax code. Government-owned airports are financed largely with tax-exempt revenue bonds, and tax law requires that they be paid off or defeased if the airport changes hands. Currently, any debt issued on behalf of the companies acquiring the airport must be taxable debt. Schmidt proposes that the Pilot Program law be amended to permit companies to use tax-exempt debt in the acquisition of airports, including to refinance existing tax-exempt bonds of the airport in question.
These all strike me as worthwhile changes. I hope interested parties will get behind them and urge Congress to reform the Pilot Program as part of FAA reauthorization.
The House Oversight Committee held a hearing on November 3rd to hear testimony from the DHS Inspector General and the Government Accountability Office about the latest round of covert testing of TSA passenger screening performance. As with all previous red-team tests since TSA took over airport screening after its creation, the results were dismal. Inspector General John Roth told Committee members that “The failures included failures in the technology, failures in TSA procedures, and human error. We found layers of security simply missing.” Jennifer Grover of GAO testified that “TSA has consistently fallen short in basic program management.”
Committee members, who had seen but were not allowed to quote from the Inspector General’s classified September report, expressed bipartisan anger. “In looking at the number of times people got through with guns or bombs in these covert testing exercises, it really was pathetic,” said Rep. Stephen Lynch (D, MA). And “When I say that I mean pitiful.” Added Rep. John Mica (R, FL), “If it was publicly known, people would scream for some change.”
Unfortunately, despite periodic outrage over TSA’s chronic failure, the Committee did not propose fixing the underlying problem: the TSA regulates itself. Instead of being the tough aviation security regulator, holding airports and their contractors accountable for high-level screening performance, it has every bureaucratic incentive to try to make itself look good, to ensure annual budget increases, good PR, etc. The persistent failures only come to light thanks to the diligent arm’s-length work of GAO and the Inspector General.
The remedy would be to take the principle embodied in the tiny Screening Partnership Program and generalize it to all airports. TSA would be the regulator, and airports would either self-perform screening (as they do all aspects of security except screening) or hire TSA-approved contractors to do the job.
As things stand today, TSA continues to provide phony-baloney cost comparisons that claim there is only 1% difference between the cost of TSA and contractor screening. That’s actually a big improvement from 2007 when they claimed TSA was 17% cheaper-but it’s still wrong. The GAO’s November 2015 report, innocuously titled “Screening Partnership Program: TSA Can Benefit from Improved Cost Estimates” (GAO-16-19), found that TSA compares the full cost of contract screening with only those government costs that show up in TSA’s own budget. That leaves out other federal costs such as “retirement costs, foregone corporate tax revenue, and general liability insurance.” The excluded non-TSA costs average 9% of the total cost to the government (taxpayers) for TSA screening; for the 13 SPP airports GAO studied, that difference ranged from 7% to 13%.
The clear implication of GAO’s findings is that as a general rule, contract screening is less costly than TSA screening. GAO gently expresses this by saying that their findings “raise the possibility of TSA realizing additional cost savings should more airports desire to participate in the SPP.” GAO also found out that TSA does not provide its cost comparisons to Congress (since it has never been mandated to do so). Nor does it share with Congress the SPP Annual Reports it has prepared for the last three years. And-surprise, surprise-when GAO reviewed those annual reports, they found that the cost comparisons used in those internal documents do include the full government costs-even though TSA uses only the incomplete costs to make decisions on which airports are cost-justified to participate in SPP.
An article by Ken Chotiner in IHS Jane’s Airport Review (November 2015) states that “Three other hubs (Charlotte Douglas, Los Angeles, and Washington Dulles) may join SPP within the next few years.” That’s the first I’ve heard of such interest, but I hope there’s something to it. You couldn’t tell that from TSA’s recently approved FY 2016 budget. Under the line item for “Privatized Screening,” the projected increase over last year is all of 0.2%. That doesn’t sound to me like TSA is expecting any expansion of privatized screening this year.
Dissatisfaction with the cost and timeliness of cargo transportation via Fedex and UPS appears to be leading Amazon into creating its own air cargo transportation system, to be centered on Wilmington Air Park in Ohio, formerly the cargo hub for Airborne Express and later DHL.
Motherboard broke the story on Nov. 23rd, reporting that an air cargo service had begun at Wilmington in September under the name Aerosmith. It is being run by Air Transport Services Group, the holding company for Air Transport International (ATI) and ABX Air (formerly part of Airborne). Citing several knowledgeable sources, Motherboard identified Amazon as the customer. ATSG confirmed that its unnamed customer had contracted for the operation of two 767s from ABX and another two from ATI.
Brandon Fried, executive director of the Airforwarders Association was quoted as follows: “[Wilmington] is the perfect setup. It’s ready to go, it’s turnkey. They have warehousing, and they have a very sophisticated landing system in place, so it wouldn’t be outlandish for [Amazon] to bring the cargo in using a fleet of planes.” Motherboard also reported an October post on a pilots’ forum saying that Amazon was working on an air delivery operation.
The Seattle Times followed up with a Dec. 18th story saying that “Amazon is negotiating to lease 20 Boeing 767 jets for its own air-delivery services, according to cargo industry executives.” The story went on to refer matter-of-factly to “an Amazon trial operation out of Wilmington, Ohio, operated by ATSG on Amazon’s behalf.” One of those sources said that Amazon plans to make a decision on going beyond the trial run by the end of January. The Times reported data from FlightAware.com showing that ABX and ATI are flying five times a day from Wilmington to Allentown, Dallas, Ontario (CA), and Tampa, each of which has an Amazon warehouse near its airport.
If Amazon does launch a full-fledged Aerosmith operation, it would be a major development for Wilmington Air Park. When Airborne bought the former Air Force base from the local government in 1980, it became America’s largest privatized airport. After DHL merged with Airborne in 2003, DHL moved its U.S. hub from Cincinnati to Wilmington. The consolidated hub opened in 2005, but in 2008, DHL decided to contract with UPS for cargo transport, shutting down the domestic hub but retaining its international hub at Wilmington. But in 2009, tax incentives from Kentucky lured DHL to shift all cargo operations back to Cincinnati/Northern Kentucky Airport. In 2010, the company agreed to donate Wilmington Air Park to the Clinton County Port Authority, ending its status as America’s largest privately owned commercial airport.
On December 9th, the United States’ first cross-border airport terminal opened for business. Right on the border between San Diego and Tijuana, the $120 million Cross Border Xpress provides a more convenient way for U.S. air travelers to reach Tijuana International Airport, which offers direct flights to some 30 Mexican destinations. And it offers Mexican visitors to San Diego the convenience of flying directly to Tijuana and walking across the border, rather than flying from their home city to Mexico City and changing planes to reach San Diego International.
Cross Border Xpress includes the new terminal, where departing passengers check in, 850 parking spaces, and a two-way, enclosed 390 ft. tolled foot-bridge across the border. Customs and immigration facilities await travelers at either end of the bridge. Passengers must bring their bags with them as they cross the bridge.
The facility was privately developed by a small group of Mexican investors and Chicago-based Sam Zell. It was the brainchild of Carlos Laviada, a member of the board of Grupo Aeroportuario del Pacifico (GAP), the company that owns and operates Tijuana and a number of other privatized Mexican airports. According to an article by AP’s Elliot Spagat, GAP decided that the project was too risky for the company to take on, but had no objection to Laviada and another board member pursuing it as individual investors. Their venture is called Otay-Tijuana Venture LLC.
The AP article notes that the terminal and parking occupy less than half of the 55-acre site. The company has received City of San Diego approval for a 340-room hotel, shopping center, and gas station on the rest of the property. They hope to make money not from the $18 toll on the bridge (which is paying for the salaries of U.S. border inspectors, making this a kind of public-private partnership) but from duty-free shopping, other concessions, parking, and rental car companies.
Cross Border Xpress is apparently one of only two cross-border airport facilities in the world. The other is for an airport serving both Basel, Switzerland and France’s Upper Rhine region.
Mixed Results in Airport Satisfaction Survey. The good news in the 2015 J.D. Power North American Airport Study is that the average score of 725 (out of a possible 1,000) is up quite a bit from the 690 average of five years ago. But the results can’t be welcome news for the lowest-ranked airports. In the Large airport category, the bottom five (out of 31) were Philadelphia, Chicago O’Hare, LAX, LaGuardia, and Newark. The top-ranked Large airports were Portland (OR), Tampa, Las Vegas, Orlando, and Salt Lake City. The average score for this group was 719. For Medium airports, the winners were Dallas Love, Southwest Florida, Indianapolis, Raleigh-Durham, and Jacksonville, while the lowest-ranked were St. Louis, Montreal, Kahului, Houston Hobby, and Cleveland. The average for this group was 752, significantly higher than the average for Large airports.
Ontario Sale Approved by Los Angeles. On Dec. 16th the Los Angeles City Council voted 13-0 to approve the planned sale of Ontario Airport to the Ontario International Airport Authority, created in 2012. Once the FAA approves the deal, the City of Ontario will reimburse Los Angeles World Airports for $60 million in outstanding airport bonds. Over the following 10 years, Ontario will pay $120 million to compensate LAWA for improvements it made to the airport while owning it.
New Orleans Attracting More Airline Service. Louis Armstrong International Airport has recovered smartly from its post-Katrina doldrums. It was America’s fastest-growing airport in terms of passengers in 2013, and fourth fastest-growing in 2014. Allegiant, Frontier, and Spirit, along with Southwest and the three mega-carriers are all part of this growth. And in December start-up airline GLO began daily flights to Little Rock, Memphis, and Shreveport. The airport is under way on a new terminal to replace its old one, scheduled to open in 2018, the city’s tricentennial year.
San Diego to Build Replacement Terminal. The San Diego Regional Airport Authority has approved a $2.2 billion plan to replace aging Terminal 1, as well as rebuilding its single main runway and making other facility improvements. Phase 1 of the plan will cost $1 billion, and will begin following what is expected to be two years of design and environmental studies.
Global Entry to Expand to Foreign Nationals. Customs & Border Protection has announced that U.K. citizens will soon be allowed to apply for membership in its Global Entry program. CBP is also having discussions with officials in Germany, Japan, and South Korea about offering this to their citizens, as well. Expanding the pool of trusted travelers will speed processing time at Customs & Immigration, allowing CBP officers to focus more time on other travelers.
London City Airport Attracts Investor Interest. At least three groups are expected to prepare bids for the 75% of London City Airport owned by Global Infrastructure Partners. The three investor groups deemed likely to bid are Borealis Infrastructure/Allianz, Macquarie, and Ontario Teachers’ Pension Plan/Kuwait Investment Authority/Hermes. The airport has experienced strong passenger growth, from 2 million in 2005 to an estimated 4.1 million in 2015.
Porter Airlines Jets from Toronto Vetoed. With the new Canadian government strongly opposed to lengthening the runway of island-based Billy Bishop Airport in downtown Toronto, the airport’s owner/operator-Ports Toronto-announced that the plan is dead in the water. Technical analyses that were under way will not be completed. That decision kills the plan by Porter Airlines to fly Canadair’s new C Series jets from Billy Bishop to distant points in the United States-and may cause Porter to cancel the planned jets purchase.
Los Angeles Unveils $5 Billion Plan to Deal with Landside Congestion. Los Angeles World Airports will host an industry forum on Feb. 4th to brief potential developers on its $5 billion Landside Access Modernization Program (LAMP). The two largest components are planned as public-private partnership (P3) deals under which the winning bidder would design, finance, build, operate, and maintain the facility for 30 to 40 years. Those components are a 2.25-mile $3 billion automated people mover (APM) connecting the central terminal area to a five square mile consolidated rental car center (Con RAC), estimated to cost $1 billion. The project also includes new parking garages and bridges between the APM and the individual terminals.
New Book Critiques War on Terror. Two researchers whose work I have cited in this newsletter, John Mueller and Mark G. Stewart, are the authors of Chasing Ghosts: The Policing of Terrorism, just out from Oxford University Press. It’s far broader in scope than just aviation security, which is addressed in two of its ten chapters. I haven’t read it yet, but these are two analysts whose work on aviation security I’ve come to respect, so I commend the book to your attention.
“When an organization transitions from government into the private sector, you’re much more focused on the customer, your competitiveness, efficiency, quality-all those good things that come with a commercial business. We came with that infrastructure development capability and a good story to tell. So then we became very successful in acquiring a number of UK, European, and other airports around the world. We looked at tens of opportunities, possibly even a hundred opportunities. Every airport is different, and it reflects the jurisdiction in which it’s operating. It reflects the range of responsibilities you have as an airport in a particular jurisdiction. Some of that is regulation-based and some of that is based on how responsibilities of an airport are allocated between what the airlines do, what the airport does, and what government does. The types of airports are also different. Sydney, for example, is a destination airport. Some are low-cost airports, some are transfer hubs, or they can be regional, secondary airports. Many of the airports we owned had strong brands and a real sense of place-we are now focusing on developing that strong brand and sense of place at Sydney Airport.”
-Kerrie Maather, CEO of Sydney Airport, former CEO of Macquarie Airports, interviewed by Lynda Dugdale, “The Woman Future-Proofing Sydney Airport,” Intheblack.com, Nov. 1, 2015
“Taking most, if not all, of the high taxes off the ticket price would remove the incentive for the airlines to use untaxed ancillary fees to make huge profits. High federal ticket taxes are one of the reasons why airlines resort to massive fees on checked bags and ticket changes, in part because those are untaxed activities. Radically lower taxes on ticket prices will help consumers and the airlines in the short and long term, because lower travel costs should help spur more airline travel and likely drive additional spending at airports.”
-Christopher Versace, “Will Congress Lead the Way on Airport Reform?” Forbes.com, Dec. 3, 2015
“I understand the argument the big three carriers have in terms of subsidized competition, but I think their arguments are self-serving, and at the same time we’ve got competition issues here in the USA that are probably more important than that. My view is not only should the Middle Eastern carriers be allowed to do what they are doing, but we are [also] for ‘cabotage,’ we are for open access to airports, we are for competition because we think we do best when there are no barriers.”
-David Cush, CEO, Virgin America, quoted in Ghim-Lay Yeo, “Born in the USA,” Airline Business, December 2015