Policy Study

How to Privatize Orange County’s Airports

Executive Summary

The sale of assets, including John Wayne Airport, has been discussed as part of the solution to Orange County’s fiscal woes. But the County faces a dilemma with regard to the potential sale of John Wayne, for two reasons. First is the potential of serious competition from a future airport at El Toro, which might drain business prematurely from John Wayne, threatening its financial viability. Second is the likelihood of litigation by the airlines, who contend that a municipality may not legally make use of the proceeds from the sale of an existing federally aided airport.

This study identifies several different types of airport privatization (contract management, lease, and sale) and outlines the legal status of each, with respect to federal grants and constraints. The nexus of federal control is the grant agreement between an airport receiving federal grants and the grant-making agency, the Federal Aviation Administration. In the absence of such an agreement, there is no restriction on the use of airport revenues or privatization proceeds. Moreover, a privately owned airport is eligible to receive the principal type of federal grant used in airport development (discretionary grants). Airports privatized via lease and contract management are eligible for all types of federal grants.

The solution to Orange County’s apparent dilemma is therefore to use two different types of privatization, in a coordinated fashion. The County should seek a single firm that will enter into two separate agreements: 1) a long-term contract to manage John Wayne Airport; and 2) a purchase or lease agreement under which the firm will develop a commercial airport at El Toro. Development of the latter will be closely coordinated with future activities at the former, to ensure the continued financial viability of John Wayne Airport through the years needed to retire its outstanding bonds.

This approach will permit Orange County to receive sales proceeds or lease payments from the private developer of the El Toro airport. It will also permit such an airport to be financed and developed, independent of the County’s impaired fiscal condition in the wake of its bankruptcy. It avoids all gray areas in federal aviation law, thereby minimizing the risk of litigation. Ideally, it should also win the support of the airlines, as offering a lower-risk way of bringing about the timely development of the El Toro airport.