National Academies Press: OpenBook

Considering and Evaluating Airport Privatization (2012)

Chapter: Chapter 3 - Service Contracts

« Previous: Chapter 2 - The U.S. Context and Generic Privatization Models
Page 18
Suggested Citation:"Chapter 3 - Service Contracts." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
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Page 19
Suggested Citation:"Chapter 3 - Service Contracts." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
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Page 19
Page 20
Suggested Citation:"Chapter 3 - Service Contracts." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
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Page 20

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18 3.1 Specific Strategies Contracting of services or outsourcing refers to the delega- tion of operations from the public sector to a private entity that specializes in the operation, maintenance, or manage- ment of that activity. Most U.S. airport owners outsource at least some services or functions. Findings from a 2004 airport survey indicate: • Concession management and custodial services are the most common services outsourced. • Outsourcing is more common in large airports, although smaller airports tend to outsource more specialized ser- vices such as legal and accounting. • Airport directors use outsourcing primarily to achieve pre- dictable reductions in the costs of non-core activities and to obtain on-demand specialists and lower level support personnel at lower costs.5 Examples include: Traditional • Maintenance services (e.g., terminal cleaning and janito- rial, window cleaning, landscaping) • Conveyance systems (e.g., elevators, escalators, moving walkways) • Mechanical systems (e.g., HVAC) • Airline equipment (e.g., baggage systems, jetways, pre- conditioned air, common use equipment) • People mover systems • Parking operations • Shuttle bus operations • Financial planning • Financial advisory Less Typical • Development agents for commercial land development • ARFF • Security guards • Law enforcement • Terminal concession development and management Project Development and Delivery Services Many airports have adopted frameworks for construction and/or program management to allow the airport owner to economically and efficiently administer airport development projects. Construction management services tend to be used for single projects while program management services are employed to deal with a multitude of integrated, concur- rent construction projects whereby the program manager provides the technical expertise to oversee all the projects within a large capital program on the airport owner’s behalf. Examples include: • Planning studies (e.g., master plans) • Architectural, engineering, design • Construction inspection • Construction management (e.g., procurement assistance, contractor oversight, inspection and testing, project close out, external coordination) • Program management (e.g., scheduling, design oversight, project controls, accounting/finance, construction bid eval- uation, construction manager oversight, comprehensive status and progress reports, administrative support) In general, airport owners pursue these strategies to real- ize cost savings and to enlist specialized expertise from the private sector. 3.2 Examples of Service Contracts There has been a wide variety of service contracting employed in the United States as illustrated by the following examples. C h a p t e r 3 Service Contracts 5J. Gonzalez, Outsourcing and Airport Services, Airport Magazine, Volume: 16, American Association of Airport Executives, May/June, 2004.

19 3.2.1 Maintenance Contracts Subcontracting with private companies for all types of ser- vices is routine for U.S. airports, including maintenance ser- vices (e.g., terminal cleaning, window cleaning), conveyance systems (e.g., elevators, escalators, moving walkways), mechan- ical systems (e.g., HVAC), people mover systems, shuttle bus operations, airline equipment (e.g., baggage systems, jetways, pre-conditioned air, common use equipment). For example, the City of Manchester, New Hampshire, which owns and operates Manchester Airport, outsources a significant num- ber of services through contractual arrangements, including terminal cleaning and mechanical systems. The city also con- tracts out HVAC, elevator, escalator, and jetway maintenance services.6 The city has used this approach for many years so it appears to be working well for them. 3.2.2 ARFF and Law Enforcement Service Contracts Less typical is the contracting of services for ARFF and law enforcement. The City of Manchester also outsources its law enforcement and ARFF functions. The Rockingham County Sheriff’s Department provides law enforcement, security ser- vices, and central communication services under a publicly bid, fixed-price contract. Centurion Protection, Inc. pro- vides ARFF services under a fixed price contract whereby the airport provides all of the equipment and facilities and Centurion provides the services to comply with FAA stan- dards and requirements.7 3.2.3 Fuel System Operation A number of U.S. airport operators own the airport jet fuel storage and distribution system and contract out the main- tenance, operation, and management to qualified and expe- rienced airport fuel system operators (e.g., Oakland, Guam). 3.2.4 Contract to Operate Common Use Equipment Airline consortia operate and manage common use equip- ment and systems at several airports, including Chicago O’Hare’s Terminal 5, the Tom Bradley International Terminal at Los Angeles International Airport, and the International Terminal at San Francisco International Airport. At San Francisco, the airlines operating in the International Terminal Complex (ITC) formed the San Francisco Terminal Equipment Company, LLC (SFOTEC) to use, operate, and maintain certain airport-owned common use equipment and systems related to handling flights and passengers.8 The equipment includes computer check-in systems with baggage and boarding pass printers, flight information systems, bag- gage handling systems, passenger loading bridges, and sys- tems for delivering pre-conditioned air to aircraft and ground power for aircraft. The airport financed the cost of the equip- ment with airport bond proceeds while SFOTEC manages the daily assignment of the ITC joint use gates, holdrooms, ticket counters, and baggage systems to the airlines operating in the ITC in accordance with airport approved protocols. Under the services contract between the airport and SFOTEC, SFOTEC is obligated to (1) maintain, operate, repair, and schedule the common use of such equipment, (2) pay the associated utility and custodial costs, and (3) pro- vide non-discriminatory access to such equipment for all ITC carriers, whether or not they are members of SFOTEC. The costs of operating and maintaining the equipment are shared by all airline users of the equipment. The user fees for air- lines that are members of SFOTEC are determined under the terms of the SFOTEC Members Agreement, while the user fees of non-member airlines are negotiated between SFOTEC and the non-member airlines (charter airlines). 3.3 Legal and Regulatory Considerations Although service contracts are common at U.S. airports, the FAA has not promulgated specific rules or published detailed policies or guidance on them. Service contracts must however follow standard local, state, and federal procurement rules. In some cases, such as contracting for ARFF services, other fed- eral regulations (i.e., FAR Part 139) must be followed. When considering contracts for law enforcement services, federal law (i.e., TSR Part 1542) may be relevant and state laws often define the parties that are permitted to provide such services. 3.4 Evaluation of Service Contracts 3.4.1 Opportunities The main opportunities provided by service contracts include: • May reduce operating expenses due to lower private sector employment and overhead costs, and thereby reduce costs to tenants 6City of Manchester, New Hampshire, Official Statement, General Air­ port Revenue Bonds, June 23, 2005. 7Ibid. 8City and County of San Francisco, Official Statement, San Francisco International Airport Second Series Revenue Bonds, Series 2009E, November 5, 2009.

20 • Accesses private sector expertise for specialized functions • Applies private sector techniques to accelerate project deliv- ery and reduce construction costs for capital improvements • If applicable, uses private agents for commercial development 3.4.2 Advantages The main advantages provided by service contracts include: • Provides potential to cut costs and optimize efficiency • Retains airport oversight of contracts to ensure compli- ance with airport goals • Reduces airport costs for employee salaries and benefits as well as post retirement expenses and liability (pension, medical, etc.) • Involves low implementation risk and complexity • Allows airport management to focus on core and strategic issues • Maintains airport owner control over land uses and facilities Airlines view contracting of services as a viable option towards a broader goal, such as lower costs or more efficiency at an airport. Because airport costs play an increasing role in airline service decisions, there is added impetus for airport owners to consider outsourcing services. Airlines have also embraced the concept of the airline terminal equipment main- tenance consortium as a means of achieving cost savings. Some international airport operators believe their cost structure is lower than U.S. airports because most of their services are contracted out. 3.4.3 Disadvantages and Risks The main disadvantages and risks under service contracts involve relations with public employees: • Could involve organizational disruption (i.e., reassign- ment or termination of existing employees) • Could encounter labor resistance in an effort to protect and increase public sector jobs • Requires careful monitoring, which can be expensive and time-consuming • Presents tension in the outsourcing relationship—the con- tractor wants to make a profit and the airport owner wants to cut costs Organized labor in the United States wants to be involved in all parts of the airport industry from design, construction, and maintenance of infrastructure to its operation with union- ized employees. Privatization is an issue unions track closely to ensure the interests of their members (both public and pri- vate sector) are protected. This includes concern that abrogat- ing union contracts, limiting the collective bargaining rights of labor, and cutting wages and benefits might become attractive cost-saving strategies for potential private owners of airports. Any privatization policies that enable either the direct abroga- tion of union contracts, the contracting out of existing airport employees’ work, or have the clear effect of reducing wages and benefits will be measures labor strongly opposes. In some cases, this reality may dissuade airport owners from privatizing work. Outsourcing can save money if airport owners are careful about what they buy and if they set up performance-based contracts that hold contractors accountable for meeting qual- ity service standards. Outsourcing a service that invites risk, and failing to manage that risk through active contract moni- toring, can produce unfavorable results. While some U.S. airport managers cited several examples of successful service contracts (e.g., airline equipment con- sortia), others were more critical of them. In fact, several air- port managers pointed to examples of certain functions that had been privatized, but reverted to public control or owner- ship, including janitorial services, baggage handling systems, jetway maintenance, and ramp control services. See Chapter 7 for further discussion. In March 2011, New York City’s deputy mayor, Stephen Goldsmith, who had been known as “the prince of priva- tization” when he was mayor of Indianapolis in the 1990s, announced plans to “in-source” services that the city had previously privatized to save money. He claimed to find $41 million in immediate savings by taking the work of the city’s data center and wireless network back in-house.9 In sum, tasks that are well-defined, easy to monitor, and available from competing contractors—sometimes called commodity tasks—are prime candidates for outsourcing. Conversely, tasks that are complex, changeable, lack clear benchmarks, or have little or no competition—custom tasks— are often kept in-house.10 9Is Privatization a Bad Deal for Cities and States? New York Times (Opinion Pages), April 3, 2011. 10John Donahue, Outsourcing the Wrong Jobs, New York Times, April 4, 2011.

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TRB’s Airport Cooperative Research Program (ACRP) Report 66: Considering and Evaluating Airport Privatization addresses the potential advantages and disadvantages of implementing various approaches to airport privatization.

The report covers a range of potential privatization options and highlights case studies conducted at a variety of airports both within the United States and internationally.

Appendices C through H, to ACRP Report 66 are available on a CD-ROM that is included with the print version of the publications.

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