National Academies Press: OpenBook

Considering and Evaluating Airport Privatization (2012)

Chapter: Chapter 6 - Full Privatization

« Previous: Chapter 5 - Developer Financing and Operation
Page 42
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 42
Page 43
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 43
Page 44
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 44
Page 45
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 45
Page 46
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 46
Page 47
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 47
Page 48
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 48
Page 49
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 49
Page 50
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 50
Page 51
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 51
Page 52
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 52
Page 53
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 53
Page 54
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 54
Page 55
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 55
Page 56
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 56
Page 57
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 57
Page 58
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 58
Page 59
Suggested Citation:"Chapter 6 - Full Privatization." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
Page 59

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

42 6.1 Specific Strategies Under the full privatization models, the airport owner enters into a long-term lease/concession or sale of an airport with a private operator, which can be accomplished inside the APPP or outside of the program (Table 6.1). Under a long-term lease or concession agreement, the air- port owner grants full management and development control to the operator in return for the operator undertaking full capital improvements and other obligations (e.g., up-front payment, responsibility for outstanding debt). Under a sale, the airport is transferred on a freehold basis with the require- ment that it continue to be used for airport purposes. The use of a concession or lease has been seen as a way for governments to reassert control over assets either in the last resort or at the end of the concession lifetime. Among the benefits are: • From the standpoint of public perception, ownership of a strategic national asset is retained. This can be a sensitive issue, particularly if foreign buyers are involved. • The concession documentation can be a way for the air- port owner to maintain control over areas which it believes to be strategic. These can include, for example, investment programs, service standards, and aeronautical and public parking pricing policies. Concession agreements can in some cases extend hundreds of pages. • Concessions offer the opportunity for the airport owner to participate in the continuing success of the airport through rents or performance-related concession payments, which may, for example be related to turnover, profit, or traffic levels. This can have strong advantages for airports which are seen as high risk or facing major initial capital expen- diture requirements. Regarding a sale, there is a strong preference for a trade sale over an IPO on the basis of experience from international airport privatizations. Trade sales are primarily attractive because of the higher receipts they yield to the government compared with IPOs. There are a number of reasons for this: • The trade buyer is typically an experienced purchaser and has often gone through significant expert due diligence of the asset in a way that is not open to IPO purchasers. The risks attached to the purchase are therefore lower. • A trade buyer is willing to pay a premium for control. • Trade buyers can develop and implement a strategy for the company in which they are confident, and if necessary hire the required staff to implement it. Retail buyers are depen- dent on the company’s management to develop and realize such strategies, and their confidence in the competence of the management team will impact the price they are willing to pay. • Trade buyers have been able to apply modern financing tech- niques to fund their purchase, which has enhanced value. These are more extensive transactions than airport-wide management contracts because significant airport develop- ment is anticipated. The term of the lease is related to the length of time needed by the operator to recover its invest- ment in new facilities. A long-term lease transfers the principal responsibility for airport operations and development to the private lessee. Airport users pay fees and charges directly to the operator, with the operator taking on the risk involved in cov- ering both operating and capital costs out of those revenues. In addition, under the full privatization model, the air- port owner transfers federal sponsorship requirements to the operator, whereas under partial privatization models the airport owner remains the sponsor. 6.2 Examples of Full Privatization There are fewer examples of the long-term lease or sale of an airport in the United States than (1) partial privatization strategies and (2) international airport transactions. Below is C h a p t e r 6 Full Privatization

43 a brief description of examples inside and outside the APPP. For more background, please see Chapter 9 and Appendix H where two examples inside the APPP (Stewart International Airport and Chicago Midway Airport) and one example out- side the APPP (Morristown Municipal Airport) are reviewed in depth as case studies. 6.2.1 Airport Privatization Pilot Program (APPP) As shown in Table 6.2, there have been a number of appli- cations for the APPP since it was created in 1996, although the only applicant to complete the process as of March 2012 was Stewart. 6.2.1.1 Stewart International Airport The first and only airport (as of August 2010) to be approved by the FAA under the APPP was Stewart Inter- national Airport in Newburgh, New York (60 miles north of New York City). National Express Group PLC, a U.K.-based transportation company, paid $35 million for the 99-year award in 2000 (its first airport acquisition). Because the owner, the State of New York, was unable to secure airline Table 6.1. Full privatization strategies. Transaction Model Description Inside APPP Outside APPP Long-term lease Contract by which airport is conveyed to an entity for a specified period Limited to one large- hub airport in the U.S. Any airport Long-term concession Contract to transfer rights to manage and or operate a property for a certain period, usually without property rights Limited to one large- hub airport in the U.S. Any airport Trade sale Competitive sale of an airport through a bidding process that usually results in majority control with a single entity Limited to general aviation airports in the U.S. Any airport Flotation or initial public offering (IPO) Sale of shares in the airport to individual and institutional subscribers through the stock market or other vehicle where management retains control Never done in the U.S. Never done in the U.S. Table 6.2. The Airport Privatization Pilot Program (as of March 2012).

44 approvals to use the payment for general state purposes (dis- cussed in detail below), it used the lease payments for airport purposes and to recoup past subsidies for Stewart Airport and its other state-owned airports (from the prior six years) in accordance with the FAA’s revenue use policy. Just as U.S. airport privatization appeared to be re-energizing, Stewart reverted back to public ownership in 2007 when National Express decided to exit the airport management business and sold its interest in the airport to the Port Authority of New York and New Jersey, the operator of the three largest com- mercial service airports in the New York metropolitan area. 6.2.1.2 Chicago Midway Airport The City of Chicago received airline approvals for its Mid- way Airport pilot privatization application, but this effort is on hold due to the inability of the selected private consortium to secure financing in the aftermath of the global credit crisis of 2008. The consortium of investors led by Citigroup Inc., John Hancock Life Insurance Co., and a unit of Vancouver International Airport submitted the highest bid ($2.5 billion) to lease Midway. When the deal fell through in early 2009, the consortium had to pay a $126-million penalty to the city. The FAA has granted the city’s request for more time to complete the deal through a series of extensions to maintain its spot (the one reserved for a large-hub airport) in the APPP. In its January 2010 filing, the city told the FAA that it “intends to complete the privatization process at the earliest practi- cal date” but noted that “the pace and direction continues to be dictated by conditions in the global credit and capital markets.” The city indicated that talks could resume with the highest bidder or other qualified bidders, or the city could put the airport out for bid again. 6.2.1.3 Luís Muñoz Marín International Airport, San Juan, Puerto Rico The Puerto Rico Public-Private Partnership Authority, on behalf of the Puerto Rico Ports Authority, is actively pursuing full privatization under the APPP of the Luís Muñoz Marín International Airport in San Juan. As of December 2011, the government has received preliminary approval by the FAA to enter the program, received preliminary airline approval for the plan, issued a request for qualifications, received six qualified responses, and issued the request for proposals from the best-qualified teams. Government officials want to reduce most, if not all, of the more than $800 million of debt the Ports Authority is carrying through a lump sum pay- ment. The concession would be for no more than 50 years and would also require the operator to make improvements to the airport. 6.2.1.4 Other APPP Applicants Regarding the inactive airport applicants, all of which withdrew their applications except Stewart, and prior to the application submitted by New Orleans International, the FAA in 2004 reported: Several common elements to the five airports that submitted applications were: 1) management of the airport was not the own- er’s primary responsibility; 2) all airport facilities were under- utilized airports with either limited or sporadic commercial service and serving a general aviation clientele; 3) transferring the airport from public to private ownership is time consuming; 4) all airports were operating at a financial loss and receiv- ing some form of subsidy from their parent agencies; 5) the private operators proposed to use a limited liability corpora- tion to manage the airport; and 6) a strong political commit- ment was needed to successfully transfer the airport to private control.32 The FAA also reported that the final application for Niagara Falls International Airport was withdrawn following the FAA’s comment that the application no longer appeared financially viable. The selected private operator noted that its business plan was no longer valid. In addition, the rapid growth in air service at competing airports in the Buffalo and Hamilton, Ontario markets, coupled with circumstances following the terrorist attacks of September 11, 2001, created an environ- ment that made it impossible to evaluate the airport’s mar- ket potential. The application of New Orleans Lakefront Airport was dis- missed by the FAA in April 2008 in the aftermath of Hurricane Katrina and in view of the Orleans Levee District’s diminished responsibility under revised State law. The public owners of San Diego Brown Field and Rafael Hernandez Airport (Aguadilla) did not file final applications and withdrew their preliminary applications. The Puerto Rico Ports Authority (PRPA) withdrew its application for Aguadilla after going through the process to select an opera- tor when PRPA management decided to develop the airport without the assistance of the private operator. San Diego withdrew its application in the face of community opposition to the idea of a cargo hub and its adverse impacts and an FAA air traffic impact analysis that identified potential conflicts between the proposed cargo traffic at San Diego Brown Field and traffic from surrounding airports and military bases that would have to be mitigated. 32U.S. Department of Transportation, Federal Aviation Administration, Report to Congress on the Status of the Airport Privatization Pilot Program United States Code, Title 49, Section 47134, August 2004.

45 The city of New Orleans withdrew its application for Louis Armstrong New Orleans International Airport in November 2010 citing the following reasons: After analyzing the conditions required to effectively privatize public infrastructure and the current state of capital markets, it has been concluded that New Orleans is not well positioned at this point in time to solicit bids for privatizing the Louis Armstrong International Airport. Rather, the airport is bet- ter served by focusing on its recently announced initiatives to improve operations and become a more effective asset for the City of New Orleans and the State of Louisiana. The Louis Armstrong New Orleans International Airport is thus withdraw- ing from the FAA APPP.33 This review makes clear that the tumultuous first decade of the new century, which was so challenging to the airline industry, provided less than ideal conditions for the financ- ing of airport deals under the APPP. 6.2.2 Outside the APPP Morristown Municipal Airport is a general aviation air- port that is owned by the Town of Morristown and has been managed and developed by DM AIRPORTS, LTD, an affiliate of the DeMatteis Organizations, since 1982 under a comprehensive 99-year lease. Although this lease did not require any special federal or state legislation (such as the APPP), it was entered into before the FAA formalized much of its policy regarding full privatization outside the APPP. The town granted DM AIRPORTS full management and development control in return for undertaking all capital improvements (many of which were needed at the time the lease was executed) and for defeasing the outstanding air- port debt. DM AIRPORTS pays a relatively modest annual rent to the town to cover its cost to provide continuing police, emergency medical, and grant administration ser- vices for the airport. DM AIRPORTS retains all airport fees and charges in return for taking on the risk to cover operat- ing expenses and capital expenditures (net of grants) out of those revenues. It is important to note that the Morristown privatiza- tion occurred before the FAA promulgated its revenue use policy and before the creation of the APPP. Therefore, it is not reasonable to expect to be able to repeat this expe- rience because the federal rules concerning, for example, the transfer of management responsibility and the use of rent proceeds and the private operator’s compensation, are much stricter now. 6.3 Legal and Regulatory Considerations 6.3.1 General Conditions The following legal requirements historically have influ- enced whether public airport operators have pursued partial or full privatization. These requirements have created oppor- tunities for an airport owner to enlist private participation while remaining the airport sponsor (partial privatization) and simultaneously erected barriers to transferring sponsorship to a private operator (full privatization): • FAA approval authority—Grant Assurance 5 requires FAA approval before the airport owner can “sell, lease, encum- ber or otherwise transfer or dispose of any part of its title or other interests” in the airport. The Surplus Property Act and subsequent statutes authorizing transfer of federal property for public airports contain similar requirements. In practice, FAA approval is required only for a sale or long-term lease of airport property to a public or private entity. Public airport owners can enter into management contracts, concession agreements, leases of airport facili- ties, and a host of other agreements with private entities without FAA approval. U.S.DOT and FAA thus act as the gate-keeper to full privatization. • Revenue use—Both federal law and the grant assurances strictly limit the use of airport revenue for non-airport purposes. Airport revenue is defined broadly to include the proceeds from the sale or lease of airport property. There are some narrow exceptions, such as for so-called “grand- fathered” airports and for repayment of loans issued by sponsoring governments. However, Congress has expressed serious concern with revenue diversion and has prescribed onerous penalties for violations. The prohibition on rev- enue diversion applies only to the airport sponsor, not the air carriers, FBOs, concessions, private airport managers, or any other private entities that conduct business on an airport. This has incentivized private ventures on airports but has dis-incentivized full privatization. It historically presented a particularly high barrier to full privatization because, outside the APPP, the public airport owner is required to use the sale proceeds for airport purposes and because the private operator, upon assuming responsibil- ity for the grant assurances, must use revenue that it gener- ates in connection with the airport for airport purposes. • Grant eligibility—Under the AIP, public entities are eligible to receive an apportionment from the Entitlement Fund and to receive grants from the Discretionary Fund. In con- trast, private entities are not eligible to receive an appor- tionment, and only private operators of certain types of airports are eligible for certain types of discretionary grants. 33Louis Armstrong New Orleans International Airport Withdraws from FAA Airport Privatization Pilot Program, New Orleans Aviation Board Press Release, October 21, 2010.

46 Specifically, public-use airports operated by a private entity that are designated as relievers or that have at least 2,500 annual passenger boardings are eligible for funding for airport development projects, airport master planning, noise compatibility planning, and noise program imple- mentation projects. This financing structure historically dis-incentivized full privatization because it encouraged public entities to retain the role of sponsor, and thus eligi- bility for funding under the AIP. • Grant repayment—Another historical barrier to full priva- tization was the uncertainty as to whether or not a public airport owner would be required to repay the federal gov- ernment upon sale or long-term lease to a private operator, for the value of land acquired from the federal govern- ment under the Surplus Property Act, for the value of land acquired with federal financial assistance, or for the value of grant-funded capital improvements and equipment. The relevant statutes clearly require reinvestment or repayment in the event the property is sold for a non-airport use; how- ever, the statutes are ambiguous as to whether the reinvest- ment or repayment obligation is triggered by transfer of the airport to a private operator for continued use as a public airport. This uncertainty historically dis-incentivized full privatization because of the potential financial liability associated with privatization. • Non-aeronautical activities—Airport owners have con- siderably greater latitude over non-aeronautical activities than aeronautical activities. For example, airport owners must charge a minimum of fair market value for non-aero- nautical use, but can charge higher amounts for rent and other fees, subject to Constitutional standards. Similarly, airport owners are not subject to the prohibition on grant- ing exclusive rights with respect to non-aeronautical users of an airport. While public airport operators theoreti- cally are subject to suit under the anti-trust statutes, many courts have found that public entities are immune from liability for certain anti-competitive behavior. Private enti- ties would not enjoy similar immunity. The greater control and flexibility over non-aeronautical activities presents the opportunity for a private operator to generate a return on its investment by maximizing non-aeronautical revenues to the greatest extent permitted by the market. This oppor- tunity comes with some liability exposure to the private operator. As to partial privatization, airport operators can enlist private participation in non-aeronautical activities through, for example, master concession agreements and similar vehicles, to give private enterprise a significant role in non-aeronautical activities. • Constitutional Rights and Protections—State and local gov- ernments acting as airport operators must not deprive air- port tenants and users of the rights and protections afforded by the U.S. Constitution. These rights and protections include, for example, freedom of speech and the press under the First and Fourteenth Amendments,34 and equal protection and due process rights under the Fifth and Fourteenth Amendments. While private parties typically are not responsible for guaranteeing Constitutional rights and protections, courts have applied the Constitution to private actors providing a “public function”35 or where the private action is “entwined” or “entangled”36 with state action. One court has held that a private entity operating an airport pursuant to a lease with the public airport owner is responsible for ensuring Constitutional protections.37 However, the extent to which private airport operators engaged in the range of activities described herein as full and partial privatization would be deemed state actors responsible for guaranteeing Constitutional rights and pro- tections is uncertain. • Property Taxes—Public airport operators enjoy exemp- tions from property taxation pursuant to the constitution and/or laws of most states. These exemptions typically would not apply to a private operator of a public-use air- port. This tax structure dis-incentivizes full privatization, at least any transfer that would jeopardize the airport’s eligibility for an exemption. 6.3.2 The Airport Privatization Pilot Program (APPP) The APPP, as enacted in 1996 and amended in 2003 and 2012, reduced uncertainty about the privatization process and addressed the recognized barriers to privatization by 34The U.S. Supreme Court has declared that airport terminals are non- public fora, meaning that speech may be subject to reasonable govern- ment regulation. 35Lebron v. Nat’l R.R. Passenger Corp., 513 U.S. 374, 115 S.Ct. 961, 130 L.Ed.2d 902 (1995); West v. Atkins, 487 U.S. 42 (1988) (private physician employed part-time by a state prison hospital); Lugar v. Edmondson Oil Co., 457 U.S. 922 (1982) (private seizure of property executed under a state garnishment statute); Terry v. Adams, 345 U.S. 461 (1953) (privately- run public elections); Marsh v. Alabama, 326 U.S. 501 (1946) (conduct on public streets in a company town); but see Blum v. Yaretsky, 457 U.S. 991 (1982) (private nursing home receiving government funds), Rendell- Baker v. Kohn, 457 U.S. 830 (1982) (private, remedial high school receiv- ing government funds); Moose Lodge No. 107 v. Irvis, 407 U.S. 163 (1972) (private club with a state-issued liquor license). 36Brentwood Acad. v. Tenn. Secondary Schools Athletic Ass’n, 531 U.S. 288 (2001) (private athletic association 84% of whose members are public schools); Evans v. Newton, 382 U.S. 296 (1966) (public park cre- ated by private will, but maintained and supervised by a municipality); Pennsylvania v. Bd. of Dirs. of City Trusts of Philadelphia, 353 U.S. 230 (1957) (private school operated by a state agency); but see Nat’l Collegiate Athletic Ass’n v. Tarkanian, 488 U.S. 179 (1988) (national athletic asso- ciation with members from many states not a “state actor” with respect to Nevada law). 37Niswonger v. Am. Aviation, Inc., 424 F. Supp 1080 (D. Tenn. 1976).

47 permitting U.S.DOT to grant exemptions from certain fed- eral obligations that historically impeded full privatization.38 However, Congress required that airports and private opera- tors satisfy demanding conditions in exchange for the exemp- tions and approvals, including conditions specifically designed to protect its interests and those of the airport users. The FAA thereafter prescribed detailed procedures for seeking these exemptions and approvals. Viewed as a whole, the APPP today is complex, demanding, and lengthy. This is in part because full privatization transactions are more complicated in general, but also due to the specific legislative requirements imposed by the APPP. The federal law creating the APPP prescribes the following requirements: 1. A general aviation airport may be sold or leased. A com- mercial service airport may be leased only.39 2. Ten airports may receive approval to privatize under the APPP.40 One of the 10 airports must be a general aviation airport.41 No more than one airport may be a large-hub primary airport.42 3. The Secretary may permit the public airport owner to use sale or lease proceeds for non-airport purposes upon approval (i) in the case of a primary airport, by at least 65% of the scheduled air carriers and by scheduled and unscheduled air carriers accounting for 65% of aircraft landed weight at the airport, and (ii) in the case of a nonprimary airport, by the Secretary after the airport has consulted with at least 65% of the owners of aircraft based at the airport.43 4. The Secretary may exempt the public airport owner from any legal requirement to repay prior grants or return air- port property to the federal government.44 5. The Secretary may permit the private operator to use air- port revenue for non-airport purposes in order to “earn compensation from the operations of the airport.”45 6. The statute requires that the following nine conditions must be satisfied to obtain approval: a. The airport will continue to be available for public use on reasonable terms and without unjust discrimination. b. The airport will continue to operate in the event the private operator becomes insolvent, seeks bankruptcy protection, or under similar circumstances. c. The private operator will maintain, improve, and mod- ernize the airport in accordance with plans submitted to the Secretary. d. Rates and charges on air carriers will not increase faster than the rate of inflation unless a faster increase is approved by at least 65% of the air carriers serving the airport and by air carriers accounting for at least 65% of aircraft landed weight at the airport. e. The fees on general aviation aircraft will not increase faster than the rate of increase for air carriers. f. Safety and security at the airport will be maintained at the highest possible levels. g. Noise effects will be mitigated to the same extent as at a public airport. h. Adverse environmental effects will be mitigated to the same extent as at a public airport. i. The sale or lease will not abrogate any collective bargain- ing agreement covering airport employees.46 7. The Secretary must conclude expressly that approving the sale or lease will not result in unfair and deceptive practices or unfair methods of competition.47 8. The Secretary must ensure that the interests of general aviation users at the airport are not adversely affected by the sale or lease.48 9. The private operator will be eligible to impose a Passenger Facility Charge.49 10. The airport will be eligible to receive an apportionment from the Entitlement Fund.50 11. The private operator may impose “reasonable rental charges, landing fees, and other service charges from air- craft operators” consistent with the Anti-Head Tax Act.51 38As noted in an earlier report: “. . . legal and economic constraints cur- rently impede the sale or lease of U.S. airports. Although FAA has per- mitted and even encouraged some limited forms of privatization, such as contracting for airport management or allowing private companies to develop and lease terminals, it has generally discouraged the sale or lease of an entire airport to a private entity. FAA is concerned that in selling or leasing an airport, the legal obligations that the airport had made to obtain a federal grant may not be satisfied. Chief among these obligations are restrictions on using airport revenue . . . Recognizing the barriers to and the opportunity to test the potential benefits of privatization, the Congress established an airport privatization pilot program as part of the Federal Aviation Reauthorization Act of 1996.” Source: General Accountability Office, Airport Privatization, Issues Related to Sale or Lease of Airports, November 1996, GAO/RCED-97-3. 3949 U.S.C. § 47134(a). 40Id. § 47134(b). In the initial version of the APPP adopted in 1996, the number of airports was limited to five. It was increased to 10 by the FAA Modernization and Reform Act of 2012, Pub. Law No. 112-95, § 156 (2012). 41Id. § 47134(d)(1). 42Id. § 47134(d)(2). 43Id. § 47134(b)(1)(A). 44Id. § 47134(b)(2). 45Id. § 47134(b)(3). 46Id. § 47134(c). 47Id. § 47134(e). 48Id. § 47134(f). 49Id. § 47134(g)(1). 50Id. § 47134(g)(2). 51Id. § 47134(g)(3).

48 12. The federal share of financial assistance in grants issued from the Discretionary Fund issued to a private operator is 70% of project costs.52 In September 1997, the FAA published detailed pro- cedures for the submission and review of applications to sell or lease an airport in accordance with Section 47134.53 The application procedures have the key features shown in Figure 6.1. Note on Foreign Investment—In addition to the FAA appli- cation procedures, it is possible that the sale or lease of an airport to a private operator that is a foreign entity may be subject to investigation by the Committee on Foreign Investment in the United States (CFIUS).54 An investigation may be initiated by the President, by the CFIUS, or based on voluntary notice of the intended transaction to the CFIUS. The President can prohibit the transfer upon finding that the foreign interest threatens to impair national security. Alternatively, the CFIUS can impose conditions to mitigate an identified threat. The CFIUS is concerned principally with transactions by which a U.S. business would become con- trolled directly or indirectly by a foreign government. In 2006, the sale of port management businesses in six major U.S. sea- ports to a state-owned company based in the United Arab Emirates (DP World), created a controversy when political figures in the United States feared the sale would compro- mise U.S. port security, even though the sale was approved by the CFIUS. After both the U.S. House and Senate took actions to block the sale, DP World sold the U.S. ports to a U.S. asset management company, ending the controversy. 6.3.3 Full Privatization Outside the APPP Since 1996, no public airport operator has sought to sell or lease an airport to a private operator outside of the APPP. However, this option remains available, and may be pursued in the event that either all the available slots in the APPP pro- gram are encumbered, or if an owner chooses to privatize outside the regulatory boundaries of the APPP. The FAA has not published guidance specifically on this subject; however, the FAA provided some guidelines in the Airport Compliance Manual, released in September 2009.55 Privatizing outside the APPP has the following attributes: 1. FAA approval is required to transfer the grant assurances from the public owner to the private operator and may be required for other purposes. 2. The FAA will review a request to transfer an airport to a private operator in a similar fashion to its review of a request to transfer an airport to another public entity. 3. The FAA may require the public airport operator to main- tain concurrent responsibility for certain grant assurances, such as the obligations concerning compatible land use and hazards to air navigation. 4. The FAA will not approve an application without a com- mitment by the private operator to assume responsibil- ity for the grant assurances and any Surplus Property Act deed restrictions. 5. The FAA will not exempt the public airport operator from the prohibition on revenue diversion, but may permit the private operator to recover its initial investment and receive compensation for managing the airport. 6. The FAA will not require repayment for the value of grant-funded projects and land transferred by the federal government according to FAA Order 5190.6B. 7. The private operator will not be eligible for an apportion- ment from the Entitlement Fund. 8. The private operator will be required to obtain a separate Airport Operating Certificate and to prepare an Airport Security Program. 9. The private operator could impose a charge on passen- gers, but could not require the airlines to collect a PFC. Table 6.3 compares the key features of full privatization under the APPP and outside the APPP. 6.4 Evaluation of Full Privatization The most comprehensive research on the effect of priva- tization, corporatization, and ownership forms on airport performance concluded there is strong evidence that: • Airports with government majority ownership and those owned by multi-levels of government are significantly less efficient than airports with a private majority ownership; • There is no statistically significant evidence to suggest that airports owned and operated by U.S. government branches, 52Id. § 47109(a). In the initial version of the APPP adopted in 1996, the federal share was 40%. It was increased to 70% by Vision 100—Century of Aviation Reauthorization Act of 2003, Pub. Law No. 108-176, § 163 (2003). 53FAA, Notice of Final Application Procedures, Airport Privatization Pilot Program: Application Procedures, 62 Fed. Reg. 48693 (1997). 54See 50 U.S.C. § 2170. See also Dept. of Treasury, Final Rule, Regu- lations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons, 73 Fed. Reg. 70716 (2008); Dept. of Treasury, Notice, Guid- ance Concerning the National Security Review Conducted by the Com- mittee on Foreign Investment in the United States, 73 Fed. Reg. 74567 (2008). 55FAA Order 5190.6B, Airport Compliance Manual, § 6.15 (Privatization Outside of the Airport Privatization Pilot Program) (Sept. 2009).

49 Figure 6.1. APPP application procedures.

50 independent airport authorities in North America, or air- ports elsewhere operated by 100% government corpora- tions have lower operating efficiency than airports with a private majority ownership; • Airports with a private majority ownership achieve signifi- cantly higher operating profit margins than other airports; • Whereas airports with government majority ownership or multi-level government ownership have the lowest operat- ing profit margin; and • Airports with private majority ownership derive a much higher proportion of their total revenue from non-aviation services than any other category of airports with significantly Table 6.3. Key features of full privatization under the APPP and outside the APPP. Full Privatization Pursuant to Pilot Program (49 USC § 47134) Full Privatization Outside Pilot Program (per FAA Order 5190.6B) E ligible Airports No more than five airports eligible to participate. Only one slot currently available. No cap on number or type of airports. Lease or Sale Commercial service airports can be leased, but not sold. General Aviation airports can be leased or sold. Airport can be leased or sold. Airport Sponsorship and Grant Assurances Private operator becomes airport sponsor, subject to Grant Assurances. The FAA may require public airport owner to remain responsible for certain Assurances. Private operator becomes airport sponsor, subject to Grant Assurances. The FAA may require public airport owner to remain responsible for certain Assurances. FAA Approval FAA approval required under the APPP statute. FAA approval required, primarily to transfer the Grant Assurances to the private operator, and to approve a new Airport Operating Certificate, if applicable. Application Process The FAA has developed application process specifically for the APPP. Subject to the application requirements for transfer or release of Grant Assurances, currently set forth in FAA Order 5190.6B. Use of Sale Proceeds Public airport owner can request FAA approval to use sale proceeds for non-airport purposes. For primary airports, requires consent of 65% of airlines. For nonprimary airports, requires consultation with 65% of based aircraft owners. Sale proceeds must be used for airport purposes. Use of Revenue by Private Operator The FAA is authorized to permit private operator to earn compensation from airport operations. Private operator generally subject to the prohibition on revenue diversion. FAA may recognize right to recover initial investment and receive reasonable compensation for managing airport. Grant Repayment The FAA may excuse public airport sponsor from any repayment obligation that may exist. The FAA will excuse public airport sponsor from any repayment obligation that may exist. AIP – Entitlement Private operator is eligible for grants from the Entitlement Fund. Private operator is not eligible for grants from the Entitlement Fund. AIP – Discretionary Private operator at certain types of airports may be eligible for grants from Discretionary Fund. If eligible, federal share will be limited to 70% of project cost. Private operator at certain types of airports may be eligible for grants from Discretionary Fund. If eligible , federal share will be 75% or 90%, depending on NPIAS status of airport. Rates and Charges Rates on airlines may not exceed inflation rate without consent of 65% of airlines. Rates on aircraft owners may not exceed percentage rate increase on airlines. Rates and charges must be reasonable and not unjustly discriminatory, pursuant to Grant Assurances. Private Operator’s Charges on Passengers Private operator is authorized to impose, collect and use a Passenger Facility Charge. Private operator not authorized to impose a PFC but is authorized to impose charges on passengers, subject to reasonableness and non- discrimination requirements of the Grant Assurances.

51 lower aeronautical charges than airports in other ownership categories excluding U.S. airports.56 6.4.1 Opportunities Some of the opportunities cited for full privatization include: • Creates potential to promote increase in service, com- merce, and economic development. Policy makers recognize that airports are strategic assets and have the potential to deliver long-term value to the local economy. Some policy makers see airport privatiza- tion as an economic development strategy. For example, David Alvarez, executive director of the Puerto Rico Public- Private Partnerships Authority, believes that the privatiza- tion of San Juan’s Luis Munoz Marin Airport is, “More than a transaction, it is an economic development mea- sure for Puerto Rico.”57 He also believes that the private sector can do a better job than the public sector managing airports. • Secures a lump sum or ongoing lease payments by selling or leasing airport for budgetary relief (asset monetization) or for annual payments to government owner. One of the primary motivations for airport privatization from policy makers may be to derive cash proceeds from the sale or long-term lease of the airport either through an up-front payment or annual payments. However, diverting airport lease or sale proceeds is prohibited under federal law without airline approval, and this can only be accom- plished under the APPP. Often there is tension between the desire for money from the lease and not wanting to turn over a public asset to the private sector. The financial situation for municipalities is expected to get worse as they run out of ways to raise funds for pensions, capital improvements, and ongoing operations. Therefore, the potential for a cash-out payment (under the APPP) may be attractive to politicians that do not currently receive financial benefits from airports because of the prohibition on revenue diversion. • Obtains private capital investment for capacity expansion and modernization and reduces need for public invest- ment and debt. A confluence of factors may force U.S. airport owners to explore privatization in the not-too- distant future, including the potential loss of tax-exempt financing, real reductions in AIP funding, and no increase in the PFC level. • Has the potential to increase the operating efficiency of existing facilities. • Has the potential to introduce technological and manage- ment expertise. • Has the potential to allow for more commercialization and potential for a more business-like management philosophy for the airport. As the largest and most important tenant for commercial service airports, airlines in the United States are still skeptical about full privatization, but can see some benefits if it is “done right and well.” The key concerns for U.S. airlines are rea- sonable rates and charges, maintenance of the facilities, and sufficient (but not excessive) facilities. They believe that some airports are better candidates than others for full privatiza- tion. They believe the “practicality for privatization” depends on the factual circumstances for the airport. For example: – Higher debt airports are less appealing candidates for privatization because the higher the debt, the higher the premium needed to pay off the debt and still realize a mean- ingful residual payment for the government. Moreover, the airport debt is likely to be tax-exempt while the private entity would need to replace that debt with more costly taxable debt. – Well run airports are not good candidates for privatization because it will be more difficult to extract cost efficiencies and uncover revenue opportunities from the future opera- tion of the airport. – Airports that have problems with governance and lack operational independence might be better run under alter- native structures such as privatization. There could be sig- nificant efficiencies gained if the airport is shielded from political influence. 6.4.2 Advantages Advantages cited regarding full privatization include: • Allows airport to be developed, managed, and operated as a business. However, it should be noted that U.S. airport managers believe that as a number of airports have transi- tioned from residual to compensatory ratemaking, public airport managers have been motivated to operate their air- ports more efficiently and be more entrepreneurial. U.S. airport managers also feel that they can do as good a job, if not better, than private operators if they were unburdened by cumbersome, rigid regulations and pro- cesses such as civil service hiring and construction bid- ding requirements. Nevertheless, some airport managers 56Tae H. Oum, Nicole Adler, Chunyuan Yu, Privatization, corporatiza- tion, ownership forms and their effects on the performance of the world’s major airports, Journal of Air Transport Management, November 2006. 57David Alvarez, Puerto Rico Airport PPP Update & Perspectives, Bond Buyer Transportation Finance/P3 Conference, November 10, 2010.

52 expressed frustration with the lack of speed when under- taking public projects and the inherent problems associ- ated with the many local requirements to accept the lowest bid. With a PPP, the government can avoid the low bid, move faster, get better quality control, and still meet dis- advantaged business enterprise (DBE) goals. • Provides ability for the private sector to innovate, introduce operational efficiencies, and create new income streams. The areas with most potential for private operators are (1) oper- ating efficiencies, by maximizing the utilization of existing facilities and incentivizing employees, and (2) maximizing non-aeronautical revenues. – Regarding the utilization of existing facilities, one oper- ator has realized 30% to 40% savings in terminal space requirements by strategically positioning new tech- nology such as common use self-service kiosks at key points (parking lots, rental car return areas) to move passengers more efficiently and minimize the amount of ticket queue space needed. – In terms of non-aeronautical revenues, by making the security screening process more efficient, passengers have more time to spend post security and are more relaxed. In addition, private operators tailor concession programs to the airport’s demographics and actively manage these programs. – Private operators have more flexibility to incentivize employees (e.g., bonuses, succession programs, and training), can use employees for a wider range of disci- plines, and are not burdened by public processes. They note that public ownership imposes significant costs on the system especially through procurement rules (e.g., local business enterprise goals, consultant selection, concession awards) and rigid personnel systems. • De-politicizes airport operations and insulates airport from broader public policies. • Provides flexibility to structure and tailor debt to meet infrastructure needs, including potential to tap foreign markets for financing. 6.4.3 Disadvantages Disadvantages cited regarding full privatization include: • Involves significant time, effort, and out-of-pocket expense to undertake (for both the public and private sector). Therefore, an airport owner seeking to privatize its airport(s) needs to give careful consideration to the design of the privatization transaction process. Failure to meet the requirements of potential investors could lead to a lack of willingness on the part of investors to participate in the bidding process. • Involves loss of control by policy makers such as long-term policy decisions, influencing the award of contracts, and hiring decisions. Losing control over airport assets can be a vexing decision for policy makers. In addition, there is not always consensus among policy makers on the merits of privatizing their airport. • Requires multiple layers of approvals (federal, state, local, tenants, and employees). • Can be constrained by existence of airline use and lease agreements. • Involves limitations on aeronautical rate increases and requires airline approval to take money out of the aviation system, which can be difficult to obtain and can reduce the value of the transaction. The airlines often also ask for capital investment commitments. Some U.S. airport managers feel that the requirement for 65% airline approval puts the airlines back in control of airports because their approval is needed for the air- port owner to monetize the airport. Private airport oper- ators feel that the APPP is an “utter failure.” For example, the unusually restrictive rules under the APPP give air- lines an “effective veto” over privatization. Moreover, they expressed concern that the airlines got a “sweetheart deal” at Midway, which will serve as the baseline for all future privatization transactions. On the other hand, some airlines see merits in the idea of stable and predictable landing fees and rental rates that could come under privatized airports. In fact, as a result of the concessions made in the proposed Midway transaction, the airlines have started to be more receptive to potential long-term leases. It was important to Southwest Airlines that the Midway deal included price caps and operating standards. The operator lease included extensive perfor- mance standards that were negotiated with the city and Southwest. Southwest also required guarantees that the airport would be run in a customer service friendly fashion, with a particular focus on pricing controls—to the great- est extent possible—with respect to parking, concessions, etc. Southwest wanted to make sure that concessions and parking rates, in particular, were competitive with those at Chicago O’Hare so that use of Midway by passengers was not cost-prohibitive. The Midway lease also required that the operator continue to make capital expenditures to maintain and develop the airport, which was an important factor for the airlines. However, some airlines expressed skepticism on whether the selected Midway operator could have made the Midway deal work and concern that the deal might have been rene- gotiated if the operator was failing. Given the long-term nature of the leases, airlines are concerned about controlling their costs at airports in the future. They will endeavor to do this through negotiated price caps and escalators, and/or through some form of participation in the concession agreement.

53 • Tempts elected officials to want to cash-out value (“bor- row against the future”) without necessarily appreciating and understanding the long-term implications to the air- port enterprise. For example, many U.S. airport managers believe that the Midway transaction was proposed almost entirely for the upfront payment. They believe it was not pursued because of the lack of competence of its manage- ment team or the inability to finance airport improve- ments. Airport managers were concerned about the longer term implications of the transaction on the ability for Midway to serve the needs of the community. The airlines noted that it is important to align the inter- ests of the parties (airport owner, private operator, and air- lines) more closely. Rather than a large upfront payment, they think it might be better to structure the transaction with annual payments whereby all parties benefit if the airport grows. They reason that a large upfront payment does not motivate the airport owner beyond the transac- tion date and leaves all the risk to the operator and airlines. This in turn motivates the airlines to negotiate a cap on rate increases to mitigate their risk in the transaction. • Involves higher financing costs (for private capital) than public tax-exempt debt. Usually full privatization transactions are financed by a mix of equity, bank debt, and bond debt. Although private operators can optimize the capital structure in a prudent manner, they universally agree that the tax-favored status in the United States (which was cited as worth as much or more than 200 basis points) is a significant deterrent to full privatization. In addition, bank loans have shorter amor- tization periods than tax-exempt bonds, which increases the refinancing risk. Therefore, it is vital to time capital expenditures correctly and not overbuild facilities. Lenders (banks) have become more selective when it comes to identifying investment opportunities. They tend to focus on (1) leverage, senior lien, and refinancing risk, (2) cash flow stability, and (3) security (i.e., in the case of default, lenders need recourse to assets to offset the debt). Investors (private equity funds, infrastructure funds, and pension funds) are concerned about risk and return, control, and transaction process. Investors determine the rate of return that they will require in exchange for expo- sure to these risks, which tends to vary among the three categories of investors. Regarding equity, the airlines are concerned that private entities need to earn a return on their investment in addi- tion to higher borrowing costs from their lack of access to tax-exempt debt and grants (outside the APPP). As interest rates increase in the future, the spread between taxable and tax-exempt debt will likely increase. They are concerned that savings from more efficient operations and enhanced non-aeronautical revenues may not be large enough to recover the operator’s higher cost of capital except at air- ports that are run inefficiently and/or have high social policies. However, private airport operators were dismissive of those who cite privatization as likely to lead to increased costs to air carriers. They believe it is in the interest of the airline and the private operator to keep costs low. Also, under federal regulations, aeronautical rates are subject to the reasonableness and unjust discrimination stan- dards imposed by the grant assurances. In fact, around the world, private airport operators face a variety of national regulations covering aeronautical rate-setting (e.g., approval by regulators, standards legislated consistent with International Civil Aviation Organization (ICAO) principles, and airport-airline dispute resolution mecha- nisms) and they still manage to earn a profit. Private airport operators were also dismissive of claims that they cannot compensate for their profits through cost reductions. They believe they can realize significant sav- ings over public airport operators by not being bound by public procurement and management procedures. Part of those savings can be used to hire more qualified staff, even if they have to pay their staff more. The operators invest in highly qualified people and use their expertise to drive down the costs to operate the airport while keeping capital expenditures in check. • Could involve buyouts and compensation for existing public workers. Labor will strongly oppose any privatization measures that abrogate union contracts, contract out existing airport employees’ work, or reduce wages and benefits. Under the APPP, airport owners are not permitted to abrogate col- lective bargaining agreements covering airport employees. In the Midway transaction, the city of Chicago secured the support of unions by ensuring that current employees would be offered jobs with similar pay and benefits in the lease with the operator or in another department within the city. The city’s commitment to use the lease proceeds to fund pensions and city infrastructure also helped win union support for the transaction. In the Stewart transaction, the state required the opera- tor to retain the State Troopers for airport security protec- tion to avoid labor issues. In Midway and Morristown, the cities retained the responsibility for providing police and fire protection. • Can involve implementation risk in the event the bidder desires to get out of the transaction. As shown in the Stewart case study, the airport owner reserved the right to approve any assignment of the lease and prohibited the operator from selling the lease for a period of five years. • Can involve loss of control of the airport by the airport owner. However, the airport owner can include performance

54 standards in the lease, which can be fixed for the duration of the long-term contract. • Affords limited opportunities because many of the largest U.S. airports already operate like commercial enterprises and few of the smaller airports have strong commercial potential. As noted earlier, the airlines contend that some airports are better candidates than others for full privatization. They believe the “practicality for privatization” depends on the factual circumstances for the airport. • May result in a renegotiation of the contract due to chang- ing market conditions, which are next to impossible to foresee, because of the long-term nature of these leases (50–99 years). • Creates long-term risk and responsibility for the airport owner to continue to oversee the performance of the privatized operator and may also require the airport owner to be ready to operate the airport, if needed, in the event of default or bankruptcy. • Can expose the airport owner to political, legal, opera- tional, and financial risk if the transaction is not consum- mated or if the private entity incurs financial difficulties. • Uncertain effects on tort liability for acts of terrorism, air- craft accidents, etc., particularly since the private opera- tor would not likely be entitled to the same sovereign legal immunities as a public entity. • Runs the risk that tenants and users may perceive pricing to be unfair because the private operator will likely offer mar- ket pricing even though aeronautical charges will be subject to fee reasonableness requirements and under the APPP to air carrier consent for fee increases greater than inflation. If tenants and users are accustomed to low and subsidized costs they may not respond well to market prices, particu- larly if they are not introduced in an incremental manner. • Presents potential for controversy in the event of foreign ownership. In addition, it is possible that the sale or lease of an airport to a private operator that is a foreign entity may be subject to investigation by the CFIUS. For example, the sale of port management businesses in six major U.S. seaports to a state-owned company based in the United Arab Emirates (DP World) in 2006, created a controversy by political figures in the United States who feared the sale would compromise U.S. port security even though the sale was approved by the CFIUS. • Gives airport owner less control over customer service stan- dards and airport pricing although performance standards can and should be included in the lease. For example, passengers are primarily concerned with the prices and the quality of service. Prices include airline fares, purchases from airport concessions (e.g., food/beverage, merchandise, services), and the cost to use airport facilities such as parking, rental cars, taxis, WiFi, etc. For example, if airline costs increase as a result of a change in operation, the airlines could increase their ticket prices and/or cut back or eliminate flights in response. On the other hand, private airport operators believe consumer concerns about increased parking rates and con- cession pricing are a fallacy. Private developers have dem- onstrated a serious commitment to street pricing as being integral to their business model (e.g. Westfield, Market- place, and AIRMALL® at their U.S. concession operations). They believe private operators need to be competitive with off-airport parking lots and other modes of transportation, and through better management, their prices do not have to be higher to achieve more net revenue. In addition, as noted above, performance standards can and should be included in the lease. • May involve less consideration of local policy issues, envi- ronmental impacts, and community interests in favor of shareholder and investor interests. Unlike private enti- ties, public entities do not report to shareholders and are bound to a different bottom-line. • May receive less local support if the public owner cannot take money out of the aviation system. • Provides less access to federal grants. 6.4.4 Complexity, Risk, and Other Implementation Issues Entering into a long-term lease or sale involves the most complexity and risk for an airport owner as demonstrated in the Chicago Midway transaction where the city spent over three years and roughly $13 million for costs associated with the privatization process only for the transaction to fail due to the collapse of the debt and equity markets. (The city received a $126 million breakup fee from the winning bid- der and was able to reimburse itself for all its out-of-pocket expenses and still have $113 million left over for other gen- eral fund uses because the fee was considered to be liquidated damages and not airport revenue.) As noted in the Midway case study, going through the APPP can be a lengthy, complex, time-consuming, and expensive process. The rewards could be big, but success is not guaran- teed. Full airport privatization in the United States is far more complicated than privatizing toll roads or parking facilities given the highly regulated environment, a more diversified mix of revenue generating assets, complexities involved in operating an airport, the pace of technological changes affect- ing airports, and the multiple approvals needed, including: • FAA (for various approvals) • TSA (for the airport security plan) • CFIUS (if CFIUS regulations apply in the context of the sale or lease of the airport to a private operator that is a foreign entity)

55 • Labor (in particular collective bargaining agreements) • Airlines (if revenue is to be used for non-airport purposes) • Local requirements (e.g., city council) • State legislation (if existing state law would preclude the transaction and/or if seeking exemption from property taxes) Therefore, it is important to estimate the expected net pro- ceeds early in the process to know if the transaction can yield positive benefits. Other issues involved in transferring the control of an air- port (by lease or sale) to the private sector include: • Ensuring that the public interest in the airport and its ser- vices is protected. • Ensuring that private sector returns do not overly burden user non-aeronautical fees.58 Indeed, privatization gener- ates concerns about profit-taking from an asset that is tra- ditionally viewed as a nonprofit governmental function.59 Successful implementation of full privatization models also requires that there be a committed political leader to champion it.60 Bankruptcy also is an important consideration. In evaluat- ing the opportunities for and barriers to airport privatization prior to the APPP, the U.S. General Accounting Office found that the Bankruptcy Code may limit a local government’s ability to terminate a lease or management contract or substi- tute a new operator in the event of bankruptcy, and also may enable the private operator under bankruptcy protection to reject the lease or management agreement.61 Congress partly addressed this risk by requiring, as a con- dition of approval under the APPP, that the applicant dem- onstrate that airport operations would not be interrupted in the event that the private operator seeks bankruptcy protec- tion.62 Applicants have argued, and FAA has accepted, that, as a measure of last resort, the public entity could retake pos- session of the airport in the exercise of its police or regulatory powers.63 This is because, while the filing of a petition under the Bankruptcy Code triggers an automatic stay of most judi- cial and administrative proceedings, certain actions in fur- therance of a public entity’s police and regulatory power are not subject to this bar.64 As a legal and practical matter, the sale, lease or conces- sion agreement explicitly will address remedies in the event of bankruptcy. As reflected in examples of privatized assets other than airports, it may be the case that a private operator is fully capable of continuing to operate the facility while in the process of reorganization under the Bankruptcy Code. Nevertheless, bankruptcy plainly adds complexity and some measure of risk to the long-term lease or sale of an airport. It is also more difficult to offer tax-exempt financing to bidders for long-term leases, which is a way to substantially lower the amount of financing needed by private investors (as frequently employed in developer financings). This is because in order to qualify for the federal tax exemption, the asset must be governmentally owned, which means the term of the lease cannot be greater than 80% of the useful life of the asset. In addition, under IRS regulations, tax-exempt bonds cannot be used to acquire existing assets unless at least 15% of the proceeds are used for rehabilitation expenditures for buildings associated with the property.65 As noted earlier, direct and indirect federal controls dra- matically affect the incentives and opportunities for privatiz- ing public-use airports. For example: • The sale or lease of an airport to a private operator, within or outside of the APPP, requires FAA approval. • For privatization outside the APPP, the FAA requires that private operators agree to assume responsibility for the grant assurances, Surplus Property Act deed restrictions, and other federal obligations. The FAA has not indicated what other conditions might apply to privatization outside of the APPP. • For privatization within or outside the APPP, the private operator will be responsible for compliance with the grant assurances, at least for so long as the grant assurances might otherwise remain applicable. Also, the FAA may require that the public airport operator in either circum- stance concurrently maintain responsibility for certain grant assurances. • In 2009, the FAA clarified that public airport operators privatizing outside the APPP will not have to reinvest or repay prior federal grants so long as the airport continues to be made available for public use. 58Regarding aeronautical user fees under the APPP, statutory provi- sions, grant assurances, and the FAA’s Record of Decision would govern the return on investment permitted by the airport operator. Outside the APPP, grant assurances govern the reasonableness of air- port-airline fees. 59Laurence E. Gesell, Ph.D., A.A.E. Arizona State University, Airport Privatization and the Reluctance of U.S. Airports to Adapt, September 15, 2007. 60GAO, Privatization: Lessons Learned by State and Local Governments, GAO/GGD-97, March 1997. 61GAO, Airport Privatization: Issues Related to the Sale or Lease of U.S. Commercial Airports, November 7, 1996. 6249 USC § 47134(c)(2). 63See FAA, Record of Decision for the Participation of Stewart Interna- tional Airport, Newburgh, New York; In the Airport Privatization Pilot Program at 21 (2001). 6411 USC § 362(b)(4). 6526 USC 147—Sec. 147. Other requirements applicable to certain pri- vate activity bonds.

56 • The APPP permits U.S.DOT to grant an exemption from the prohibition on revenue diversion “to the extent nec- essary to permit the purchaser or lessee to earn compen- sation from the operations of the airport.” FAA guidance indicates that a private operator acting outside of the APPP would be subject to all of the grant assurances, presumably including the prohibition on revenue diversion. However, the FAA has acknowledged that a private operator may have a limited right to recover its initial investment and earn some measure of compensation for managing the airport. Table 6.4 presents a summary of the legal incentives and disincentives under partial and full privatization. Airports participating in the APPP must also satisfy nine conditions prescribed by Section 47134 (as described earlier). The sale of U.S. public airports is very uncommon, pri- marily due to the federal restrictions. Under the APPP, only general aviation airports can be sold. 6.5 Frequently Asked Questions About Full Privatization The following is a short summary—in the form of ques- tions and answers—concerning the principal legal issues pre- sented by full airport privatization within and outside of the APPP. The underlying source material (statutes, regulations, guidance, etc.) is provided in Appendix D.2. Is FAA approval required for sale or lease to a private operator? Yes. The sale or lease of an airport to a private operator, within or outside of the APPP, requires FAA approval. What conditions apply to FAA’s consideration of a request to sell or lease an airport to a private operator? Airports participating in the APPP must satisfy nine condi- tions prescribed by Section 47134. For privatization outside the APPP, the FAA requires that private operators agree to assume responsibility for the grant assurances, Surplus Prop- erty Act deed restrictions and other federal obligations. The FAA has not indicated what other conditions might apply to privatization outside of the APPP. Is the public airport owner or the private operator respon- sible for compliance with the grant assurances upon transfer? For privatization within or outside the APPP, the private operator will be responsible for compliance with the grant assurances, at least for so long as the grant assurances might otherwise remain applicable. Also, FAA may require that the public airport operator in either circumstance concurrently maintain responsibility for certain grant assurances. Will sale or lease proceeds constitute “airport revenue”? Yes. Sale or lease proceeds to any private operator will constitute airport revenue. However, an applicant under the APPP can request an exemption permitting the public air- port operator to use sale or lease proceeds for non-airport purposes (see next question). What restrictions apply to a public airport owner’s use of sale or lease proceeds? Under the APPP, the Secretary may grant an exemption permitting the public airport owner to use sale or lease pro- ceeds for non-airport purposes upon approval by 65% of air carriers, by number and landed weight, at a primary airport, and upon consultation with 65% of based aircraft at all other airports. If the applicant does not seek or obtain consent or conduct the required consultation, and for airports privatiz- ing outside the APPP, the public airport owner is required to use sale or lease proceeds for airport purposes. Is a public airport owner required to reinvest or repay the federal government when selling or leasing property acquired with “federal assistance”? Table 6.4. Summary of incentives/disincentives to partial and full privatization. Issue Partial Privatization Full Privatization FAA Approval May or may not be needed, depending on structure and terms Necessary and can deter Revenue Use Not a barrier Requires express exemption Grant Eligibility Public entity remains sponsor and eligible Entitlements only available through APPP; lower discretionary federal share for airports in APPP Grant Repayment n.a. May not be required if remains an airport Control over Aeronautical Activities Subject to grant assurances and AHTA standards Under APPP, subject to caps, grant assurances, and AHTA reasonableness standard Outside APPP subject to grant assurances Control over Non- aeronautical Activities Viable revenue source resulting from flexibility to control rates Viable revenue source resulting from flexibility to control rates

57 Maybe. Section 47134 explicitly permits U.S.DOT to excuse any reinvestment or repayment obligation. In 2009, the FAA clarified that public airport operators privatizing outside the APPP will not have to reinvest or repay prior grants so long as the airport continues to be made available for public use. Is a public airport owner permitted to use sale or lease pro- ceeds to repay the General Fund for prior contributions to the airport? Yes. Whether or not privatizing under the APPP and whether or not a public airport operator receives approval by air carriers, the public airport operator can repay loans made by the sponsoring government within the preceding six years. The public airport operator likely can also repay loans made by a sponsoring government pursuant to writ- ten obligations, whether or not issued within the preceding six years. What restrictions apply to a private operator’s use of revenue generated from the airport? Section 47134 permits U.S.DOT to grant an exemption from the prohibition on revenue diversion “to the extent nec- essary to permit the purchaser or lessee to earn compensation from the operations of the airport.” FAA guidance indicates that a private operator acting outside of the APPP would be subject to all of the grant assurances, presumably including the prohibition on revenue diversion. However, the FAA has acknowledged that a private operator may have a limited right to recover its initial investment and earn some measure of compensation for managing the airport. What restrictions apply to a private operator’s imposition of rates and charges? Section 47134 limits increases in fees imposed on air car- riers to the rate of inflation without approval by 65% of air carriers (by number and landed weight), and limits the per- centage increase in fees to General Aviation to the percent- age increase charged to air carriers. While not subject to the AHTA’s demand that rates and charges be “reasonable,” a private operator outside of the APPP would be subject to the reasonableness and unjust discrimination standards imposed by the grant assurances. Is a private operator eligible for apportionment from the AIP Entitlement Fund? Section 47134 explicitly authorizes a private operator to receive an apportionment from the Entitlement Fund. Pri- vate operators acting outside the APPP are not eligible for an apportionment. Is a private operator eligible for grants from the AIP Discre- tionary Fund? Yes. Section 47109 provides that the federal share for dis- cretionary grants for airports privatized under the APPP shall be 70%. Private operators outside the APPP may be eligible for discretionary grants if the airport is a reliever airport or receives 2,500 annual passenger boardings. Is a private operator authorized to impose a Passenger Facil- ity Charge? Section 47134 explicitly authorizes a private operator to impose a Passenger Facility Charge. While private operators acting outside the APPP technically are not eligible to impose a Passenger Facility Charge, private operators may impose charges on enplaning passengers. Is a private operator required to separately obtain an Airport Operating Certificate? Yes. A private operator, within or outside the APPP, is required to request, secure and maintain an Airport Oper- ating Certificate if the aeronautical activity at the airport demands a certificate. Is a private operator required to maintain an Airport Secu- rity Program? Yes. A private operator, within or outside the APPP, is required to maintain an Airport Security Program, depend- ing on the nature and type of commercial passenger service. Is the public airport owner or the private operator obligated to provide law enforcement at the airport upon transfer? A private airport operator, within or outside the APPP, must provide law enforcement personnel or ensure that law enforcement personnel are available to respond to an inci- dent, depending on the type of Airport Security Program in place at the airport. 6.6 Relevance and Lessons Learned From International Airport Privatization and Non-Airport Privatization in the U.S. Transport Sector As noted above, unlike in the United States, international airport privatization often means the full or partial trans- fer of airport ownership from the public sector to the pri- vate sector through very long-term leases or concessions, an outright sale, or IPOs (i.e., full privatization). This transfer of control and/or ownership is often accompanied by require- ments to improve the airport’s infrastructure and service levels and provide new capacity to keep pace with demand under a regulatory framework for aeronautical charges. Similarly, most of the non-airport transport examples entail long-term concessions or leases of the entire asset (i.e., also full privatization).

58 While there is a significant body of information to be learned from these experiences (as can be found in Appen- dices C and D), not much of it is transferable to the U.S. air- port sector given the unique regulatory, finance, and legal framework in the United States as described earlier. Some of the themes and lessons learned of relevance to U.S. airport transactions include: 1. Long-term concessions may have the advantage of enabling the owner to participate in the continuing success of the airport through securing returns from rental payments or performance-related payments. This may have par- ticular advantages for some sorts of privatizations where buyers would be unwilling or unable to make high upfront payments. 2. The success of these deals (ranging from 30 to 99 years) cannot be determined in the short term. Also, the length of a concession needs to be considered carefully. In par- ticular, longer terms raise more upfront money, but do not necessarily deliver overall best value for money. To date the term of long-term leases or concessions for “brown- field” surface transport assets has been driven, at least in part, by accounting treatment and tax exposure, and the same rules apply to airports where the useful life of exist- ing terminals can be 30–40 years. This suggests a 50-year term should be adequate for depreciation treatment on airport deals, and depending on the age of the airport, possibly less. In the case of the Chicago Skyway, the bridge had major components with a long useful life of 75 or more years, which led to the 99-year term and the city of Chicago seemed comfortable carrying the 99-year term over to Midway to maximize the upfront payment, but this term does not appear to have been driven by tax or accounting considerations. However, while a longer term does raise more upfront money, it should be remembered that it does not necessarily deliver overall best value for money. 3. Although funding constraints may be a key factor in mov- ing a public sector body to consider privatization, value for money must be the main rationale. For example, the adoption of 63-20 financing66 may have appeared to offer a low-cost funding solution, but the resultant misalign- ment of risk and reward did not always deliver value for money. Further, award criteria should not simply focus on price and, as value for money in its widest sense should be the objective, the inclusion of other considerations, such as environmental benefits, is both possible and beneficial. For airports, the consideration of wider economic and environmental benefits, and their inclusion within award criteria, is highly relevant. 4. Similarly, in measuring the success of a transaction, while the amount of the money received is an important con- sideration, it should not be the only criteria. It is also important to consider the investments made by the pri- vate entity in infrastructure, the level of service provided, the pricing of services to the public, the degree of environ- mental stewardship, and employee satisfaction. Airports, like all transportation infrastructure, do not operate in isolation, and have the same duties of care to stakeholders as other businesses. As such they must learn to balance simple monetary gains against these other wider consid- erations when considering privatization options. 5. The letting of concessions delivers a stable financial envi- ronment to address maintenance needs of economically critical infrastructure, and this appears to remain true even if the project finances fail. Indeed, many have argued that, even when projects failed financially, it should always be remembered that much needed essential economic infra- structure was delivered when it was needed, and often decades ahead of when it would have been delivered using traditional funding approaches. However, to ensure full public support, the public sponsor also needs a clearly articulated plan for how any additional proceeds raised by the public sector are to be invested, especially when revenues are being raised from one sector (such as an air- port) to finance another (such as highways or other social facilities). 6. The early years of a concession are the most vulnerable and the public sector has an important role to play in miti- gating risk in these early years. The public sector must also appreciate the expectations of the market and deliver a transparent and timely procurement process. Valuing and then correctly allocating risk is central to delivering value for money for the public sector and, hopefully, ensuring a successful outcome for all the parties involved. In recent years, the aviation industry has experienced volatile mar- ket demand and conditions, usually as a consequence of events beyond the industry’s control. Airport owners need to consider whether some form of government involve- ment whether to mitigate market risk, help provide some degree of credit enhancement, or defer rental payments in the critical early years of a concession delivers better value for money. In fact, as noted in the JFKIAT case study, the Port Authority of New York and New Jersey had to step up and provide completion financing in the context of the 2001 recession and the September 11th terrorist attacks. Also, Massport had to assist Delta in its bankruptcy 6663-20 financing refers to the issuance of tax-exempt bonds by non- profit entities to finance tangible public assets pursuant to IRS revenue ruling 63-20 of 1963, typically under long-term leases. For example, the 63-20 financing structure has been used to build hospitals, toll roads/bridges, university buildings, city halls, water and sewage facili- ties, hotels, and convention centers.

59 re organization efforts for Terminal A at Boston Logan Airport to avoid the potential for costly litigation. This is a new form of cooperation in response to market failures of previous toll roads and other privatized assets. 7. For strategic transportation projects, the role of the pri- vate sector is seen as one of delivery, not of definition or specification. A solicited approach to privatization pro- curements allows the public sponsor to maintain control of project identification (and therefore the overall strategy for the project and sector) while ensuring the private sec- tor is focused on the areas where it can best deliver value for money, namely, delivery of the service required. 8. Although projects may appear to be similar, all have unique features, and these must be understood when developing the term and nature of the deal between the public and private sectors. Also, even the most technically complex project can be procured through privatization techniques. However, the involvement of the private sec- tor cannot fundamentally change the nature of a project. For example, a project that needs a significant subsidy if procured by traditional means will still need a subsidy if procured as a privatization. In addition, even infrastruc- ture of regional or national importance can, in principle, be procured through privatization techniques.

Next: Chapter 7 - Other Examples »
Considering and Evaluating Airport Privatization Get This Book
×
MyNAP members save 10% online.
Login or Register to save!
Download Free PDF

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.

The CD-ROM is also available for download from TRB’s website as an ISO image. Links to the ISO image and instructions for burning a CD-ROM from an ISO image are provided below.

Help on Burning an .ISO CD-ROM Image

Download the .ISO CD-ROM Image

(Warning: This is a large file and may take some time to download using a high-speed connection.)

CD-ROM Disclaimer - This software is offered as is, without warranty or promise of support of any kind either expressed or implied. Under no circumstance will the National Academy of Sciences or the Transportation Research Board (collectively "TRB") be liable for any loss or damage caused by the installation or operation of this product. TRB makes no representation or warranty of any kind, expressed or implied, in fact or in law, including without limitation, the warranty of merchantability or the warranty of fitness for a particular purpose, and shall not in any case be liable for any consequential or special damages.

  1. ×

    Welcome to OpenBook!

    You're looking at OpenBook, NAP.edu's online reading room since 1999. Based on feedback from you, our users, we've made some improvements that make it easier than ever to read thousands of publications on our website.

    Do you want to take a quick tour of the OpenBook's features?

    No Thanks Take a Tour »
  2. ×

    Show this book's table of contents, where you can jump to any chapter by name.

    « Back Next »
  3. ×

    ...or use these buttons to go back to the previous chapter or skip to the next one.

    « Back Next »
  4. ×

    Jump up to the previous page or down to the next one. Also, you can type in a page number and press Enter to go directly to that page in the book.

    « Back Next »
  5. ×

    To search the entire text of this book, type in your search term here and press Enter.

    « Back Next »
  6. ×

    Share a link to this book page on your preferred social network or via email.

    « Back Next »
  7. ×

    View our suggested citation for this chapter.

    « Back Next »
  8. ×

    Ready to take your reading offline? Click here to buy this book in print or download it as a free PDF, if available.

    « Back Next »
Stay Connected!