Infrastructure funds are ready to invest in US airports
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Infrastructure funds are ready to invest in US airports

This public-private partnership airport lease model has about a 30-year track record worldwide. It’s overdue to start getting adopted in the United States.

In the United States, airport privatization is often hailed as one of the perennial next big things in transportation-related public-private partnerships. But, while airport leases have largely failed to materialize in the U.S., that may finally be about to change.

In the early 1990s, the initial American Road & Transportation Builders Association’s public-private partnership conferences routinely included sessions on airport privatization, with companies such as BAA USA and Lockheed Air Terminal making presentations. Mayoral candidates in major cities ran for office, pledging to sell or lease their airports and use the proceeds for major city improvements. Out of all this, we did get a five-airport federal pilot program that resulted in the long-term lease of Stewart Airport in New York, but not much else.

A second wave developed late in the 2000s when Puerto Rico successfully leased San Juan Internationa Airport, and the investor team dramatically upgraded that down-at-the-heels airport. The Puerto Rico lease led to several years of airport privatization conferences and two failed attempts by Chicago to lease Midway Airport and another failure to try to lease the Westchester County Airport near New York City.

Meanwhile, around the world, numerous countries followed the United Kingdom’s lead on airport privatization, mostly using long-term public-private partnership (P3) leases rather than outright selling the airports. Today, figures from Airports Council International show that 75% of airline passengers in Europe are served by investor-financed airports, as are 66% of passengers in Latin America and the Caribbean. But here in the United States, just 1% of airline passengers are served by investor-financed airports, thanks only to San Juan International. If you’ve been to airports in London, Copenhagen, Frankfurt, Madrid, Paris, Rome, Vienna, Lima, Santiago, Montego Bay, Cancun, Auckland, Melbourne, or Sydney, to name just a few, you’ve probably used a P3 airport yourself.

There is now a global industry of airport companies that, together with infrastructure investors, have added and upgraded passenger terminals in the above and many other countries. So when St. Louis geared up for a long-term P3 lease of its Lambert International Airport in 2019, 18 teams responded to the request for qualifications and the 11-best qualified teams made detailed presentations in St. Louis. Airlines serving Lambert signed on to a pro-forma agreement and it looked as if this would be the start of a new wave of airport leases in the United States. But local politics abruptly terminated the process in St. Louis just before Christmas 2019.

Nevertheless, the St. Louis exercise illustrated that there is current investor hunger to invest in the last big untapped market for airport investment—the United States. The COVID-19 pandemic’s temporary depression of air travel seems not to have dented investor interest. Two above-the odds bids for Sydney Airport (at more than 26 times the airport’s 2019 earnings before interest, taxes, depreciation, and amortization—EBITDA) have been rejected by the current airport management as too low. Based on that bid it appears infrastructure investors are taking the long view on airports as viable acquisitions despite COVID-19’s impacts.

A new Reason Foundation study assessed the potential value of 31 large and medium U.S. airports, focusing on airports owned and operated as departments of city, county, or state governments. Using data on their 2019 EBITDA obtained from the Federal Aviation Administration, FAA, we used a conservative multiple of 20 times EBITDA, and obtained a total estimated value for all 31 airports of $131 billion, with several individual airports worth more than $10 billion each. Since the airports were all partly financed by tax-exempt muni bonds, federal law requires those bonds to be paid off in the event of a change of control. So for each airport, we subtracted its outstanding airport bonds from the gross to arrive at net proceeds. In most cases, those are still very large numbers.

The report summarizes data showing that privatized/P3 airports are more productive than government-run airports, evidence that they are more passenger-friendly, and that U.S. airlines are getting comfortable with the idea. Those points may well not overcome elected officials’ desire to remain in control, micromanaging their airports for a variety of reasons.

That’s why the study also emphasizes the magnitude of the potential net proceeds and what the governments in question could do with billion-dollar-scale windfall: invest in other needed infrastructure projects the governments may not have the money for, pay down debt to improve their bond ratings or pay down the unfunded liabilities of their public employee pension funds.

As I noted last month, the latter may be the most interesting politically, especially in jurisdictions where the pension system is woefully under-funded. Nine of the jurisdictions (including Atlanta, Charlotte, St. Louis, Los Angeles, and San Francisco) could use the net proceeds from a long-term airport lease to eliminate their entire public pension shortfall, with money left over to invest in infrastructure. And another nine jurisdictions could use the net proceeds to pay down between 60% and 98% of their systems’ unfunded liabilities. My guess is that as these fiscal realities sink in, some city treasurers, chief financial officers, and public employee unions could become advocates of leasing their airports.

Meanwhile, the P3 infrastructure community faces an opportunity to educate elected officials in the governments whose 31 airports have been evaluated for long-term lease. Those officials likely and understandable are concerned about “losing control” of the airport. But that’s not what would happen in a long-term lease. The deal would be a public-private partnership, with the city/county/state as the public partner. The government would set and oversee the policies and key performance measures negotiated into the lease, holding the company accountable. During the 40-to-60 years of the lease, that government would be the regulator of the airport, rather than its operator. That’s a different role, but very different from losing control.

In addition, a shift from all-debt financing via municipal bonds to the usual public-private partnership model of debt-plus-equity would produce several important changes for airports. Because equity investors have a higher risk tolerance than conservative muni bond investors, a P3 airport may be more ready to act on needed expansion projects, even in the wake of economic downturns. In addition, a debt/equity capital structure is more resilient at getting through downturns than a 100% debt model. To simplify, equity investors don’t have to get paid every year as bondholders do, making it easier to get through recessions.

This public-private partnership airport model has about a 30-year track record worldwide. It’s overdue to start getting adopted in the United States.

A version of this column first appeared in Public Works Financing.