In this issue:
- Can TSA fix super-long screening lines?
- Increased airport PFC still seems possible
- Commission recommends airport privatization in Canada
- Screening woes may spark outsourcing
- Is there too little airline competition?
- News Notes
- Quotable Quotes
Airport managers and airline officials are outraged over screening lines that have often been 40 to 60 minutes long during peak times at major airports in recent months. Atlanta Airport CEO Miguel Southwell sent a “blistering” letter to TSA Administrator Peter Neffenger on Feb. 12th protesting intolerably long lines due to “woefully understaffed” checkpoints. Even PreCheck lanes are sometimes experiencing long waits. Airline CEOs report hundreds of delayed flights and stranded passengers in recent months.
As a result of the growing outrage, Neffenger arranged a conference call with officials at the 20 largest airports the last week of February. But the news was not good. He could offer no near-term relief, meaning that long lines are projected to be even worse during this summer’s peak travel season. I interviewed one airport official last week who took part in the call, and she expressed great frustration at the situation.
Here are the causes of today’s extra-long lines. First, TSA is refocusing on rigorous screening, after the widely publicized screening failures reported last year by the DHS Inspector General. So the regular lanes are operating more slowly. Second, new Administrator Neffenger has centralized screener training. For the first time, all TSA screeners-not just new hires but all existing screeners-must report to the agency’s new training center in Glynco, GA for two weeks of (re)training. According to the airport official I talked with, in addition to taking existing screeners away for two weeks at a time, this new requirement will increase the total time to get a new screener on board from the previous six weeks to more like 13 weeks. Third, TSA’s screener numbers are flat, despite continued growth in passenger numbers at major airports, and the agency has no plans to expand that workforce.
TSA’s answer is that more air travelers should join PreCheck, whose expedited screening lanes have a much higher throughput than regular lanes, since PreCheck members have been pre-vetted as lower-risk. PreCheck enrollment is currently 2 million, and another 4.1 million are part of other trusted traveler programs such as Global Entry. Instead of that 6.1 million, TSA would like total trusted traveler numbers to be in the 25 million ballpark.
Congress evidently agrees. Last summer the House passed a TSA bill ordering the agency to proceed with hiring third-party firms to market PreCheck on a much wider basis than under the current single-source enrollment contract with Morpho Trust. And in December the Senate Commerce Committee marked up a similar bill.
TSA is (finally) moving forward with the third-party PreCheck marketing and enrollment program, after several years of stop/start delay. Seven companies responded to its October 2016 RFP for the program, and TSA is expected to down-select several of them for oral presentations this month, leading up to contract awards by June. However, there is a serious risk of that not happening. The incumbent provider, Morpho Trust, has filed a bid protest with the Government Accountability Office, arguing that the procurement is illegal because TSA is using “other transactions authority” rather than a more typical Federal Procurement Contract process.
I’m not an attorney, so I have no idea of the legal validity of Morpho’s protest. But bid protests over federal contracts typically take many months (and sometimes years), so this protest will likely preclude any relief for beleaguered airports and airlines this year. And most such bid protests fail. A table in Aviation Week‘s Feb. 29-March 13 issue shows that the success rate over the past five years ranged from a high of 18.6% (in 2012) to a low of 12% (in 2015).
The protest is bizarre in that Morpho is not only the sole current provider of PreCheck enrollment processing (at about 350 locations); it is also one of the seven bidders on the expanded enrollment and marketing program. In effect, what the company is doing is trying to maintain its enrollment monopoly for as long as possible, while hoping to gain one of the new contracts eventually.
As I’ve written before, the breakthrough that the third-party effort would bring about is wholesale marketing to companies, trade associations, office parks, travel agents, etc. If TSA is to have any hope of reaching its 25 million goal, it will require this kind of vastly larger marketing effort. It would be tragic-for air travelers, airports, and airlines-if this several-times-postponed effort gets held up for another year or two by the incumbent provider’s bid protest.
Airport groups were sorely disappointed that their call for doubling the $4.50 per passenger airport-imposed passenger facility charge was not addressed in the House bill to reauthorize the Federal Aviation Administration. But the recently released draft FAA bill from the Senate Commerce Committee includes a PFC increase to $6.50. That’s better than nothing, but not as good as what the Administration proposed in its latest federal budget. It would allow airports to increase their PFC to as much as $8.00, while eliminating federal airport grants for the largest airports (which are fully self-supporting and don’t really need the grants). That change has had the support of many large airports in recent years; it would also enable a cut in the airport grants program of $381 million, without harming medium and smaller airports.
That version, in particular, should be pleasing to center-right groups that generally favor local self-help rather than federal spending programs. And so it proved in February when a set of “libertarian and good-government groups” sent a letter urging the House Transportation & Infrastructure Committee to eliminate altogether the $4.50 federal cap on these local airport charges. That could eventually lead to airports no longer depending on federal grants at all, as Keith Laing reported in an article in The Hill (Feb. 10th). Laing quoted from the groups’ letter saying that “Washington should get out of the way and allow airports to set a PFC that is in line with their local needs and one that reflects market realities.”
One notable dissenter from these decentralist thoughts is Grover Norquist of Americans for Tax Reform. His March 3rd letter to the Senate Commerce Committee called an increased PFC “an unnecessary and unfair burden to airline passengers.” He repeated the current airline talking points that airports have over $11 billion in reserve funds on hand and could easily issue more bonds for airport projects. In response, Marc Scribner of the Competitive Enterprise Institute noted that large cash reserves are often required by bond rating agencies, and are one of the reasons many airports have investment-grade bond ratings. He also noted that some airports have maxed out the bonds they can issue based on their existing PFC revenues, but could issue new bonds for needed projects if they could charge a higher PFC, using the new revenues to service the new debt.
Scribner made another very important point. A larger share of revenue derived from local passenger charges, rather than from airline landing fees and space rentals, would make airports less financially dependent on incumbent carriers. That would facilitate the addition of gates that could be used by new entrants, such as low-cost carriers. He cited a Brookings study which estimated the impact of limited gate availability as $4.4 billion in higher air fares, due to less competition than would be the case with more non-exclusive gates.
These are still early days for the FAA reauthorization bill. The House bill is controversial because of the airline-backed plan to take the Air Traffic Organization out of FAA and reconfigure it as a self-supporting ATC Corporation. The Senate bill includes a PFC increase opposed by the airlines but strongly supported by airports. It would be a very pro-market compromise for the eventual conference committee to include both the ATC Corporation and the PFC increase, giving both airlines and airports something they strongly favor. Both changes would lead to much better aviation infrastructure for this country.
For many years the Canadian Airports Council has argued that national government policy makes their airports too costly and hence increasingly uncompetitive. Their primary complaint is that when the government devolved the 22 largest airports to newly created local airport authorities in 1994, it required the airports to make annual lease payments to the federal government, which still owns the airports. Instead of being at a fixed rate, like most lease payments, they are a percentage of airport revenue, in some cases amounting to 30% of airport operating budgets.
The good news for those airports and their passengers is that change is in the air. The government last month published a long-awaited review of the Canada Transportation Act. The comprehensive report, Pathways: Connecting Canada’s Transportation System to the World, has 13 chapters, and covers all modes of transportation, including airports and airport security in Chapter 9. And that chapter recognizes the problem created by the lease system. Its recommendations begin with guiding principles: “A system based on competition, market forces, and the user-pay principle is the best means to deliver a robust air transport sector in most cases.”
On that basis, it singles out current policy for “charging onerous rents and taxes that undermine competitiveness,” noting that the government has collected $5 billion in airport rent since 1992, “already well in excess of the value of the assets transferred, and is estimated to collect at least $12 billion more over the next 40 years.” In addition to phasing out airport rent, it calls explicitly for the federal government to (1) divest the smaller federally owned airports to local governments, with some degree of grant support, and (2) privatize the large airports so that they can tap into equity-based financing from large institutional investors. It includes several privatization options in Appendix K of Volume 2.
One of the submissions to the Commission that carried out this transport policy review came from Aeroports de Montreal. After laying out the problems with the status quo, especially the unsustainability of the current lease payments model, it says flatly that “the time has come to consider the evolution of the Canadian model toward real privatization, based on corporatization. The AdM submission includes an appendix outlining several privatization models, prepared by consulting firm Osler.
Both of these documents are well worth reading:
As noted in a previous article in this newsletter, Atlanta airport’s CEO, Miguel Southwell, sent TSA Administrator Neffenger a strongly worded letter last month, protesting the unacceptably long wait times in screening lines. What especially caught reporters’ eyes was Southwell’s 60-day deadline for TSA to show significant improvements, or else ATL would apply to join the Screening Partnership Program, under which a TSA-approved contractor would take over passenger and baggage screening. Southwell said the airport would pursue this course “barring the implementation of some transformational technology or a dramatic shift in staffing allowances in the next 60 days.”
Unfortunately, all Southwell and the other 19 large airport CEOs got from Neffenger was the message: learn to live with it; it will be even worse this summer and we aren’t able to do much of anything about it.
For TSA, with an essentially fixed screening workforce, helping the 20 major airports is a zero-sum game. Any reallocation of staff to ATL would mean reductions elsewhere, and the majority of TSA screeners are at the larger airports. Such a move to help ATL would risk triggering SPP applications from any of the other airports that would have their screener numbers reduced.
Southwell made the smart move of copying the members of the Georgia congressional delegation on his letter to Neffenger. Channel 2 News in Atlanta asked Sen. Johnny Isakson, “Are you on board with this plan?” and Isakson replied, “Oh yeah, absolutely.” Like many members of the delegation, Isakson flies in and out of ATL every week, so he sees the long lines, even if he is in the Precheck lane.
The real question at this point is how many of the 20 major airports will emulate what ATL is planning? Currently, the only major airport with outsourced screening is SFO. It was selected as one of five airports (one in each size category) in the original TSA pilot program to test outsourced screening, and has remained with private screeners ever since. Apart from Kansas City (another pilot program member), all the other airports in SPP today are small airports like Bozeman, Key West, Roswell, and Sonoma County. Such airports often have large seasonal variations, leading to TSA problems in having the right number of screeners to match the workload.
Major airports have been reluctant, politically, to “kick out the TSA,” which is also their security regulator. But that could well be changing under today’s deteriorating screening performance at large airports. Helping make the case for SPP as a realistic alternative for airports is a new white paper from airport management consultants Steven Baldwin Associates, “Options to TSA Security: Is Private Security Screening Right for Your Airport?” (www.baldwinllc.com/wp-content/uploads/2014/02/SBA-TSA-Screening-Options-White-Paper-02-2016.pdf). It provides a primer on the program and how it works, including a list of the 21 airports currently in the program and a list of 22 TSA-Qualified Vendors. Also included are case studies of airport experiences with the program.
Its conclusion is that:
“Airport sponsors whose customer service needs (for both passengers and airlines) are not being adequately met through the use of TSA screeners should strongly consider entering SPP. . . . Overall, SBA was unable to identify any downside to entering SPP for an airport experiencing customer service concerns. In fact, through our research we received only positive feedback, either directly or indirectly, from each airport that has opted into the program. Airports uniformly reported experiencing customer service gains and increased workforce flexibility when working with airlines to meet their needs; airports were also better able to adjust staff coverage during peak periods of operations.”
Any airport considering opting out of screening by the TSA should obtain and read this report.
I’m seeing increasing concerns expressed about less competition in the now more-concentrated U.S. airline market, consisting of four mega-carriers and a bunch of also-rans. The Economist ran a critical piece in its January 23rd issue, “Airlines in America: a Cosy Club.” Aviation Week‘s Jens Flottau penned a provocative column in the January 18-31 issue titled, “Face the Real Issues: Aviation Policy on Both Sides of the Atlantic Favors Established Airlines-But Why?”
Then there was last month’s call for a national commission to study airline competition. Hardly a set of fringe groups, those calling for the study are Airports Council International-North America, the U.S. Travel Association, and the American Society of Travel Agents. Issues they would like studied include:
- Airline consolidation that has led to four carriers controlling 80% of the domestic market;
- Open Skies agreements and their impacts on competition; and,
- Alliances between U.S. and foreign carriers.
They have called for a provision to create such a commission as part of pending FAA reauthorization bills in both houses of Congress.
I don’t think U.S. air travelers are paying anything like monopoly prices. Figures from U.S. DOT, cited in a recent USA Today article about the group’s proposal, show that between 1979 and 2014 the average round-trip flight increased from 1,979 miles to 2,379 miles, but the average inflation-adjusted air fare declined from $442 to $275 (in 2000 dollars).
To be sure, there have been losers from airline consolidation. In particular, since four mega-carriers need fewer major hubs than their eight predecessors, former secondary hubs such as Cincinnati, Cleveland, Memphis, Pittsburgh, and St. Louis have lost millions of annual transfer passengers. And with the loss of the hub, in most cases local residents have fewer non-stop flight options.
A key premise of airline deregulation, as enacted in 1978, was not that it would lead to perfect competition. Rather, it was that airline markets should remain “contestable.” That means potential competition is available in the event that one or two airlines start charging fares way above competitive levels on a route. So a key question that any such national commission should address is how contestable U.S. airline markets are today.
Several factors limit contestability. One is lack of gate space at larger airports. This is not just a matter of a few “fortress hubs” where a single carrier has 75-80% of all available airline seat capacity (e.g., Philadelphia where the merged American Airlines has 77%). The Economist reports that at 40 of America’s top 100 airports, a single carrier has more than 50% of seat capacity. That is not a problem by itself; what really constrains entry is incumbent airlines having a lock on available gates, often via long-term lease-and-use agreements that provide for (a) exclusive-use gates, and (b) majority-in-interest clauses that give incumbents veto power over gate expansion.
Nashville is one of a growing number of airports that have changed that M.O. Last year when its traditional long-term agreement expired, Nashville replaced it with a new agreement that eliminates airline veto power, by changing from the older “residual cost” contract (where airlines have strong controls) to the newer “compensatory” contract, which puts far more control over facilities in the airport’s hands. For the airlines, they no longer face the risk of paying more in years when there’s an operating deficit; instead they pay predictable rates each year of the agreement.
By contrast, mega-hub Chicago O’Hare still seems to be in thrall to its two mega-carriers, American and United. ORD has been getting well-deserved criticism for spending $10 billion on new runways but not adding gates and terminal capacity. Henry Harteveldt of Atmosphere Research Group told the Chicago Tribune recently that ORD’s gate shortage is a serious problem for competition. JetBlue, Spirit, and Virgin America would all like to increase service to the airport, but have been stymied by the lack of gates. But Aviation Commissioner Ginger Evans says the airport will be negotiating new lease and use agreements with American and United in 2018, and that, she says, could lead to new gates being added.
Another problem for would-be competitors is this country’s anachronistic limit of 25% on foreign ownership of the voting shares in U.S. airlines. The Economist notes that the limit in Europe is 49%, and were the U.S. limit that high, Virgin America might have been far better capitalized and able to have expanded into a more formidable competitor to the mega-carriers, rather than remaining a niche player.
Today, the best hope for the medium and small hubs that have lost significant seat capacity over the past decade is the three ultra-low-cost carriers: Allegiant, Frontier, and Spirit. With their radically different business models, they continue to expand at a rapid pace. Allegiant in January announced that it will add 19 new routes this year, and Frontier announced plans for 42 new routes, focused on cities where it can undercut fares of the mega-carriers.
The short answer is that much of the U.S. commercial air travel market remains contestable, but there are some barriers to entry that make it less contestable than is desirable. If a new national commission focused on that, it could make a valuable contribution.
London City Airport Sells for $3 Billion. A consortium led by two Canadian pension funds-Borealis and Ontario Teachers’ Pension Plan-submitted the winning bid for close-in London City Airport. The deal values the airport at 28 times earnings before interest, taxation, depreciation and amortization. Financial close is expected by the end of March. Both pension funds have moved seriously into infrastructure investments in recent years.
Court Rejects Anti-Commercial Suit re Paine Field. The 9th Circuit Court of Appeals has rejected an appeal by the cities of Edmonds and Mukilteo against Snohomish County and Propeller Airports’ plan to build a passenger terminal at Paine Field just north of Seattle. The court rejected opponents’ claim that the FAA’s assessment (that several dozen daily landings and takeoffs by airliners would have no significant impact on surrounding communities) was flawed. Propeller will now design the terminal and perform environmental studies. Once plans are approved, the company plans to sign a 30-year lease with Snohomish County for land to build the terminal and parking facilities.
Financial Close for Two Japanese Airports. Orix Corporation and Vinci Airports have financed their acquisition of a 44-year concession for New Kansi Airport and Osaka International Airport; their winning bid was $1.6 billion. This is the first of what could be as many as 20 airport privatizations in Japan, under the Abe government’s “Abenomics” agenda.
Lyon and Nice Privatizations Launched. On March 2nd the French government announced the imminent release of tender rules for the sale of its 60% stakes in the airports Lyon Saint Exupery and Nice Cote d’Azur. Nice is estimated to be worth $1.6 billion, while the smaller Lyon Airport may be worth around $1 billion. Firm offers will be due in June, with decisions by mid-summer.
Flight-Sharing Services Declared Illegal. Two companies that used the Internet as a bulletin board so that private pilots could offer cost-shared rides to others were declared illegal by a U.S. Court of Appeals just before Christmas. Both Flytenow and AirPooler had received letters from the FAA stating that such pilots must obtain a commercial license and a Part 119 certificate. Attorneys for the Goldwater Institute, which had represented Flytenow, are considering an appeal, arguing that mere use of the Internet instead of a bulletin board at an airport-as pilots have done legally for decades-is a distinction without a difference.
TSA Gains Access to Broader Terrorism Database. Last June the DHS Inspector General told Congress that one reason TSA was not rigorous enough in screening airport workers was that it had no access to the National Terrorism Center’s TIDES database. Congressional pressure, in response to the I.G.’s testimony, led to DHS giving TSA real-time access to TIDES for this purpose, I.G. John Roth told a Senate committee in February.
Orlando Sanford Is Expanding. Last year privately managed Orlando Sanford Airport handled nearly 2.5 million passengers, up 14% from the year before (and from just 48,000 in 1995). Last month the airport announced a $43 million expansion that will add four new gates (totaling 16), three more baggage carousels, and more screening lanes. The airport is popular with ultra-low-cost carriers like Allegiant and international charter airlines.
Further Privatization of Athens Airport. As part of a bail-out agreement with the IMF and the European Union, the government of Greece is privatizing various government enterprises. Part of that agreement concerns Athens International Airport, which was developed under a long-term concession agreement with AviAlliance (which holds a 40% stake). Under terms of the IMF/EU agreement, the existing concession will be extended 20 years beyond its original 2026 expiration, and the government will sell a 30% stake to investors.
Delta Hangs on at Dallas Love Field. A federal judge has prevented Delta Airlines from being kicked out of the two gates it uses at Love Field. The bitter dispute has been referred by the City (which owns the airport) to U.S. District Court Judge Ed Kinkeade, who issued an order on January 8th preventing the airline from being evicted while the legal issues are sorted out. In his interim ruling, the judge said that the politically imposed 20-gate limit at Love Field (down from the previous actual total of 32) should be addressed and corrected by “the political powers-that-be.”
Southwest Seeks Entry to Long Beach Airport. JetBlue dominates air service at noise-restricted Long Beach the way Southwest dominates Dallas Love Field. But the results of recent noise studies show that Long Beach could accommodate nine additional daily flights without being in violation of the noise ordinance. Southwest applied for all nine slots early in February.
Atlantia Will Retain Rome Airports Ownership. Italian toll road holding company Atlantia also owns a majority stake in Aeroporti di Roma, which owns and operates Rome’s two commercial airports, Fiumicino and Ciampino. Last year Atlantia put its ownership stake on the market, and a number of global airport firms expressed interest and held discussions with the company. But shortly before year-end, Atlantia’s board decided to retain ownership of the airports, “despite having received offers to pay a price fully in line with expectations,” according to Inspiratia Infrastructure.
TSA Finally Issues Rule on Body Scanners. After losing a court case filed by the Competitive Enterprise Institute that the agency had violated the Administrative Procedures Act by deploying body scanners before following the normal rule-making process, TSA finally issued a justification on March 2nd. CEI issued a news release stating that, among other things, the TSA’s new statement “contradicts itself by arguing that body scanners do not increase passenger wait times relative to metal detectors, while relying exclusively on metal detectors for its expedited screening program.”
Hawaii Airports Extend Security Contract. The Hawaii Department of Transportation has negotiated a three-year contract extension with Securitas to continue providing various security services at the 11 state-owned airports. The company has been providing these services since 2004, handling various security tasks and managing traffic. Some of the employees are trained law enforcement officers who can carry weapons and make arrests, according to a Feb. 16th article by the Associated Press.
Feedback on Cross-Border Airports. Angela Gittens, Director General of Airports Council International emailed in response to last issue’s article about the new cross-border facility for the Tijuana Airport. She pointed out that Geneva Airport is also a cross-border facility, serving both France and Switzerland.
New Report from Airport Cooperative Research Program. The Transportation Research Board recently released “Innovative Revenue Strategies: An Airport Guide.” It is ACRP Report 121, available via the TRB website.
“Unlike taxes-such as those that support the PFC’s primary alternative, the federal Airport Improvement Program-user fees can only be imposed on the service beneficiaries. Taxes, in contrast, do not target the provision of specific services. The primary beneficiaries of airports are the passengers who use them. The PFC funds collected by an airport may only be used for a very narrow set of airport improvement projects. Charging passengers a facility user fee that will be used solely for specific statutorily-defined airport improvements [at the airport in question] cannot constitute anyone’s definition of a tax.”
-Marc Scribner, “Is Conservative Opposition to the Passenger Facility Charge Softening?” Competitive Enterprise Institute, March 3, 2016
“The Canadian model has some fundamental limitations that make it financially unsustainable because of the requirements of the land lease agreements entered into with Transport Canada. Sooner or later, Canadian airports will have to evolve; otherwise airports are likely to fall back into the same state of under-funding that led to the divestiture in the first place. This model, in which the government of Canada retains ownership, is unique in the world. The model currently dominant globally is full or partial privatization, either via outright sale or via corporatization followed by the sale of the share capital immediately or in phases. Aeroports de Montreal wishes to demonstrate to the Commission that Canada should also adopt this model.”
-Aeroports de Montreal, “The Canadian Airport Ownership Model at the Crossroads,” April 2015
[How airlines select new planes under Chinese state capitalism]
“Eight years after the Chinese government launched development of the Comac C919, the three big state airlines that must become the prime customers of the 158-seat airliner still hold only tiny orders. Why? Because-pending confirmation of the type’s performance- China Southern Airlines, Air China, and China Eastern Airlines have no directive to order in quantity, say sources for the carriers. Smaller airlines have placed orders mainly because signing the contracts helps improve their standing with the government. . . . Once Comac can demonstrate that the C919 will be a serviceable aircraft, the big carriers can expect to receive a message from their political masters: ‘Order C919s in quantity.’ . . . However good the performance of the C919 turns out to be, Chinese airline managers will see a significant drawback in operating it: Adding C919s means adding a type to the fleet, and a duplicative type at that, since the Chinese aircraft should be almost interchangeable with the Airbus A320. The airlines have been trying to simplify their fleets.”
-Bradley Perrett, “Waiting in the Wings,” Aviation Week, Feb. 15-28, 2016