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Considering and Evaluating Airport Privatization (2012)

Chapter: Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process

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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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Suggested Citation:"Chapter 8 - Decision Tree Matrix, Evaluation Checklist, and Process." 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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63 Each airport owner has different reasons for considering some form of airport privatization. Therefore, it is important to put these goals and objectives into context when consider- ing which solution may be most appropriate under the cir- cumstances. The primary purpose of this chapter is to help the reader understand the process and considerations for identifying and evaluating realistic options for private sector involvement in airport management, operation, and finance and when, why, and how to employ the private sector in light of the airport owner’s objectives. 8.1 Decision Tree Filter and Matrix The process for considering various forms of privatization involves a multi-step process starting with identification of the owner’s goals and objectives, familiarization with the specific strategies available, comparison of those goals to those of other stakeholders, identification of ways to mitigate stakeholder risks, review of the transaction’s complexity and risk, and valu- ation of the transaction (Figure 8.1). The key to achieving the highest probability of success is to be both well-informed and rigorous about the evaluation process, while accounting for the diversity of stakeholder views. Figure 8.2 summarizes the range of privatization models or families of options. Table 8.1 provides an overview and guide for selecting a privatization business model based on an airport owner’s assessment and prioritization of goals and the level of dif- ficulty and complexity to implement the strategy. The further an airport progresses along the privatization continuum, the more complicated the effort becomes, and while the stakes get higher, so do the potential rewards. 8.2 Owner’s Goals and Objectives In considering which, if any, of the privatization models are appropriate for a particular airport, the first step would be to identify the airport owner’s and the community’s specific goals and/or the problems to be addressed. This would allow for an initial screening of the alternatives that are best suited to the situation. As part of this analysis, the airport owner and its constituents should also consider options available under the current public model (e.g., transition to an airport authority). The identification of goals and objectives can derive from an internal planning exercise, input and direction from elected and appointed officials, and public outreach. This process will benefit from rigorous and contemporary air- port planning, in the form of, for example, an airport master plan, airport system plan (if applicable), business plan, or strategic plan. As illustrated in Table 8.2, some techniques do not fit certain goals, in part due to the strictures of federal law and policy. There are numerous issues that may arise in attempting to align the airport owner’s objectives with the privatiza- tion models. For example, if the primary objective is for the public owner to extract a lump sum cash payment, the only model that could meet that goal would be privatizing under the APPP, with airline approval at primary airports. In this case the term of the lease is an important consideration because the longer the term, the higher the potential payment. If the pri- mary objective is to reduce airport debt, this could be achieved by full privatization under the APPP or outside the APPP. At the other end of the spectrum, if the owner wanted to reduce costs for its airline tenants while maintaining as much con- trol as possible, it might consider service contracts. Under airport-wide management contracts, when acquiring services on behalf of the public owner, the operator may or may not be released from public procurement regulations, which is often a driving motivation in privatization efforts. This should be determined in advance based on procurement laws. For example, for the Indianapolis Airport Authority, BAA’s pro- curement of goods with their own operating funds was not con- sidered public dollars in the same way as the authority’s funds. Single-purpose airport authorities are not as likely to be attracted to full privatization under the APPP because one C h a p t e r 8 Decision Tree Matrix, Evaluation Checklist, and Process

64 Specific Strategies Stakeholders Views Goals and Objectives Risks and Mitigants Valuation Drivers Complexity And Risk Figure 8.1. Decision tree filter. Management Contract Service Contracts Developer Financing/ Operation Long-Term Lease or Sale Figure 8.2. Airport privatization continuum. Factor Attributes/Issues Service Contracts Legal Relatively easy to implement Regulatory Limited regulatory hurdles Governance Relatively limited monitoring and compliance (administration, not policy formulation) Financial Limited staffing and out-of-pocket expense required by owner Internal-economic Potential to reduce costs for tenants and users External-economic Limited or no economic development benefits Commercial Lower private sector employment and overhead costs Management Contracts Legal Limited legal constraints Regulatory No special conditions required to implement under current laws Governance Significant monitoring and compliance for owner; relatively easy exit Financial Limited staffing and out-of-pocket expense required by owner Internal-economic Potential to improve financial operations of the airport External-economic Limited economic development benefits Commercial Relatively small compensation for private operator Developer/Project Finance and Operation Legal Complicated legal constraints to conform to bond indentures Regulatory Compliance with federal grant assurances and IRS regulations Governance Limits administrative burden and staffing responsibilities of owner with limited follow-on monitoring once transaction is complete Financial Potential to create significant financial improvements via capacity for commercial enhancements and cost savings; offloads debt and risk to private sector Internal-economic Transfers risk exposure to private sector External-economic Significant potential for economic development benefits Commercial Good opportunity to generate profits for private companies Long-Term Lease or Sale Legal Significant legal hurdles, including property tax exemption and labor contracts Regulatory Most extensive regulatory hurdles (federal, state, local) and potentially airline approval requirement Governance Upfront risk; modest amount of ongoing monitoring and compliance; difficult to exit Financial Highest out-of-pocket expense to accomplish Internal-economic Uncertain outcome External-economic Potential for significant economic development benefits; upfront financial benefits with long-term risks Commercial Strong potential to generate profits for private companies Table 8.1. Guide for selecting a privatization model.

65 major appeal for this option is the ability to extract a cash out- lay to fund other government programs, and there may be little interest, incentive, or ability for an airport authority to transfer sale or lease proceeds to a general purpose government. In general, if the motivation is extracting revenue from the airport, well run airports are poor candidates for any of the privatization models because it will be more difficult to extract cost efficiencies and uncover revenue opportunities from the future operation. However, they may have available land or other property that is underutilized that could be developed by a private operator as a source of additional revenue. Motivations for private sector involvement for the airport case studies are summarized in Table 8.3. In many cases, the objectives reflected a belief that a private sector operator with airport expertise could achieve the stated goals better than a public sector operator. 8.3 Stakeholder Views As public entities, airport owners face competing demands from various stakeholders that could be affected by a change in activities that were once performed by government that are turned over to private entities. It is important to understand how these key parties perceive the change in operation and how it might affect their use of the airport. After an initial screening of the privatization models with respect to the airport owner’s goals, the next step would be to consider the perspectives and range of acceptance by major stakeholders for the models under consideration. It is important to remember that stakeholder views depend upon the unique circumstances for each airport and the means by which the public owner chooses to implement privatization. In addition, some stakeholders are more vocal than others. Communities may need to engage the stake- holders directly about the opportunities and concerns at the airport. While the information provided in this chapter can help guide an airport, it is not a substitute for airport specific information. Some communities approach this through consultant studies, blue-ribbon panels, and work- ing groups. Often the structure of the process can have an effect on the outcome. So care should be taken to avoid biasing the process. The research team surveyed key stakeholder groups to document their issues and concerns regarding privatization Partial Privatization Full Privatization1 Goals and Objectives Service Contracts Management Contracts Developer Financing/ Operation Inside APPP Outside APPP Maintain community control of airport operation and development decisions X X Secure operating efficiencies X X X X X Introduce innovative revenue enhancements X X X X X Eliminate airport subsidies X X X X Reduce airline costs X Convert underutilized facility into economic catalyst X X X X De-politicize airport decisions X X X X Address identified deficiencies in airport management X X X Advance ideological interest in private sector participation X X X X Address improper conduct, e.g. corruption X X X Access private capital X X X Accelerate project delivery X X X Reduce construction costs X X X Transfer construction risk X X X Minimize organizational disruption X Use sale or lease proceeds for non-airport purposes X* Repay airport debt X X * Only with 65% airline approval at primary airports. 1 “Full privatization” includes outright sale and long-term lease. For exam ple, the proposed long-term lease of Midway would fit in this category. Greenfield private development is not considered privatization. Table 8.2. Owner’s goals decision tree matrix.

66 and their perspectives on the potential advantages and dis- advantages. Table 8.4 summarizes the key interests of each stakeholder group. Appendix G provides a full description of the perspectives of the key stakeholder groups. 8.4 Complexity, Risk, and Other Implementation Issues An important consideration in evaluating potential priva- tization models is the level of complexity and risk to imple- ment the action. This is particularly important in the public sector where officials tend to be risk averse. On a scale rang- ing from the least complex and risky to most complex and risky, the privatization models generally can be ranked as shown in Table 8.5. A detailed discussion of the logic behind these ratings can be found in the chapters for each strategy. The size of the airport (in terms of passengers, aircraft opera- tions, or revenue) can affect the consideration of the various private-sector options given the potential savings, revenues, implementation risk, and costs of the process. Given the high costs, complexity, and implementation risk associated with full privatization as well as the regulatory dis-incentives, there has been much greater experimentation with partial priva- tization in the United States. Only 82 of the 3,332 public-use airports in the United States are privately owned, and virtually Airport-wide Management Contract Indianapolis Airport Authority Attract new airline service and encourage economic development by reducing airline costs through increased nonairline revenues and reduced operating expenses Improve customer service and quality Increase the expertise and diversity of Airport staff Developer Financing and Operation John F. Kennedy International Airport Terminal 4 (JFKIAT) Preserve financing capacity for the Port Authority's 5-year capital program Minimize construction risk and management oversight R educe operational responsibilities Deliver a functional terminal on time and on budget with no additional financing required by the Port Authority Improve operational efficiency and increase terminal capacity by replacing exclusive use arrangements with common use arrangements and new pricing approaches Gain PPP experience for possible dep loyment to other agency operations Boston Logan Terminal A Introduce private sector participation into airport operations Redevelop Terminal A while preserving the Authority's financing capacity for its sizable capital program Long-Term Lease Inside the APPP Stewart International Airport (SWF) Leverage the expertise of the private sector to develop the underutilized airport to its fullest potential Develop the real estate on the vast site to create jobs and economic development, which was a priority for the Hudson River Valley due to large industrial concerns laying off workers and closing plants at the time Get out of the business of managing airports Introduce private sector participation into airport operations Chicago Midway International Airport Maximize sale proceeds for the city's unfunded pension liability, infrastructure improvements, and other general fund purposes (primary objective) Establish a new framework of rates and charges that provides lower and more predictable rates for airlines operating at the Airport Improve the competitive position, service quality, growth prospects and efficiency of Midway Airport for the benefit of Chicago residents, airlines, and other users Ensure that future Airport development is safe , functional, efficient and delivered when necessary Minimize the City's exposure to residual risks and liabilities from the process Ensure fair and equitable treatment of existing Airport employees Ensure a smooth transition from public to private management in a timely manner Long-Term Lease/Management Contract Outside the APPP Morristown Municipal Airport Pay off $2 million in airport long-term debt Wi th the aid of federal and state grants, make substantial upgrades to the airport's infrastructure that was in a state of disarray with the airport's corporate users threatening to leave and the FAA threatening to close the facility if upgrades were not made to the airport Turn the airport into an economic catalyst for the town and the region Table 8.3. Summary of motivations for private involvement for case study airports.

67 Stakeholder Key Interests Policy Makers Ensure the airport is developed in a m anner that promotes regional economic development Create an operating environment that encourages increased passenger traffic Raise money from a sale or lease of the airport to help pay for municipal budget deficits, pension deficits, infrastructure development, and other general purpose needs Provide opportunity for operational efficiencies and revenue development Provide access to private capital for airport improvements and development Ensure the transaction is successful Retain a degree of control over the airport assets (e.g., prices, CapEx, levels of service, noise mitigation, etc.) Protect existing civil service employees U.S. Airport Management Promote safety, security, airline service, customer service, financial stability, compliance with laws and regulations, non-aeronautical revenue development, operational efficiencies, labor stability, and other m easures that enhance the reputation of the airport Provide for the best interests of the tenants, passengers, and community over the long-term Provide an opportunity for the government to monetize a government-owned asset (minority view) Deploy P3 on a select basis to ma ximize the value to all stakeholders Get relief from cumbersome public procurement rules and social policy mandates to operate airports more like a business than a unit of government Reduce federal economic regulation to allow public airports more freedom Airlines Reduce airline costs to operate at the airport Provide greater predictability and stability in rates Ensure efficient airline operations Ensure operator meets stated operating standards Provide sufficient capacity to accommodate demand Provide quality level of service for passengers Prevent monopolistic actions Construct deal that makes business sense for the airlines Permit consortiums for airline terminal equipment maintenance and fuel systems U.S.DOT/FAA Protect the federal government’s investment in airports Ensure airports abide by and comply with federal laws and regulations Provide capacity to accommodate future growth Prevent actions that would discourage growth for national airport system Privatized International Airports Promote safety, security, airline service, and customer service Take actions to increase traffic levels, driv e efficiency, introduce innovation, increase non-aeronautical revenues, and produce reas onable financial returns for investors Align operator and airline interests through per passenger charges Private Domestic Airport Operators Promote safety, security, airline service, and customer service Maximize their financial return through operating savings, revenue enhancements, and high facility utilization Expedite delivery of services re lative to public sector rules Minimize airline costs to the mutual benefit of the airlines, the operator, and passengers Incentivize employees through bonuses, succession programs, and training Prefer light handed regimes with no pricing regulation, because it provides the most flexibility Lenders Receive timely repayment of debt obligatio ns at a rate commensurate with the risk Secure senior status on debt repayment Be protected against refinancing risk Lock up as much security as po ssible in the case of default Investors Earn a reasonable return on investment, which is dependent on the amount of risk See an appropriate balance between equity and debt to maximize returns Minimize exposure to political and regulatory risk Invest for the time horizon desired Conduct the transaction under a transparent process Have access to relevant data to conduct due diligence Provide for a clear and credible timetable for the process Minimize the cost of participating, especially in the initial round Financial Advisors Provide the most advantageous conditions for the financial offering Protect the airport owner’s long-term financial interests Maximize the potential for the transaction’s success Explain which risks can be passed to the private investors and which cannot Develop a reasonable estimate of the value of the transaction and manage the government’s expectations regarding the value of the transaction Table 8.4. Key stakeholder interests. (continued on next page)

68 all of them are general aviation airports. All but one of the 522 primary and commercial service airports73 is owned by local or state governments.74 Moreover, a majority of the applicants for the APPP have been small airports75 that were underutilized, subsidized by the government owner, had either limited or sporadic commercial service, and served primarily general aviation.76 By contrast, most airport privatization transactions out- side the United States have been for an airport that was of a relatively material size in terms of passenger throughput or for a system or group of airports that included smaller airports. The likely reasons for this include: • Privatization involves significant transaction costs, includ- ing legal and investment banking advice. For a small airport, those transaction costs are likely to represent a high propor- tion of the transaction value. • Many smaller airports are not self-sustaining. Although there are several examples of airports with throughput of 1 million passengers per year or even lower that generate positive Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), they are in the minority. Although it is not impossible, it is relatively problematic to attract investors to loss-making airports. • Larger airports tend to have lower reliance on single car- riers or routes, and therefore to have relatively lower risk profiles, which helps to make them more saleable. • The lower risk profiles of larger airports also make the future investment frequently required easier to finance. 8.5 Valuation and Valuation Drivers In evaluating airport privatization models, it also is impor- tant to estimate the potential value of the transaction for both the airport owner and the private operator. The transaction value will help determine if the potential financial rewards are worth the level of effort and associated implementation risk. The valuation process includes consideration of the key attri- butes of the facility followed by a projection of key metrics. Privatization can generate value in the following ways: • Enhancing non-aeronautical revenues • Cost savings through optimized use of facilities • Rightsizing CapEx—no overbuilding Stakeholder Key Interests Rating Agencies Assess potential for a project or airport to generate adequate cash flow to pay bondholders with special attention paid to risks and risk allocation (including refinancing risk) and flexibility to deal with adverse conditions See debt fully repaid by end of the concession with an appropriate “tail period” See strong legal provisions Have the ability to withstand financial stress tests Labor Protect employment stability, pensions, and compensation levels Advocate policies that support a union-friendly outcome Participate in all activities, including design, construction, maintenance, and operation Ensure the interests of its members are protected Maintain and expand the unionizing and collective bargaining rights of their members Passengers Experience high-quality, fast, reliable, safe, hassle-free, and comfortable trip through airports Be charged reasonable prices Have access to a wide variety of concession opportunities and other amenities Table 8.4. (Continued). Model Complexity Risk Service contracts Low Low Airport-wide management contract Medium Low Developer financing/operation Medium Medium-High Long-term lease or sale High High Table 8.5. Assessing complexity and risk. 73Primary and commercial service airports are defined by the FAA as airports that (1) have scheduled passenger service, (2) enplane 2,500 or more passengers per year, and (3) are publicly owned. 74The notable exception is Branson Airport, which is the only privately owned commercial passenger airport in the U.S. that was developed on a green-field site. 75Four primary airports have applied—Stewart International Airport, Chicago Midway International Airport, Louis Armstrong New Orleans International Airport, Luís Muñoz Marín International Airport (San Juan, Puerto Rico)—of which only Chicago Midway and San Juan remain active. Six non-primary and general aviation airports have applied—Brown Field/San Diego Commerce Center, Niagara Falls International Airport, Aguadilla Airport (Puerto Rico), New Orleans Lakefront Airport, Gwinnett County Briscoe Field Airport (Georgia), Hendry County Airglades Airport (Florida)—of which only Gwinnett County and Hendry County remain active. 76FAA, Report to Congress on the Status of the Airport Privatization Pilot Program, United States Code, Title 49, Section 47134, at 2 (2004).

69 • Efficiencies on procurement and purchasing functions • Applying commercial business practices • Aligning actions with the needs of different market seg- ments (e.g., low-cost carriers) • Realizing less political and lobbying influence • Adopting a strategic and business approach to long-term needs Because no two airports are alike, each airport will have different strengths and weaknesses. For example, small hub airports cannot expect to realize the same level of concession revenues per passenger as that of a major international gate- way. Airports with an older, less efficient terminal are not able to provide the concession space needed to take full advantage of the market. Airports that are well run are weaker candi- dates for privatization because there is less value to be derived unless there is collateral land for development. But in virtually all cases there are structural inefficiencies inherent in govern- ment operation that could be improved by the private sector. The value of the transaction can be affected by numerous factors, and depends on the type of privatization as follows: Service Contracts • Condition of the facilities or equipment • Current staffing levels • Requirements to retain government staff if any • Labor hiring conditions if any (collective bargaining agree- ments, full-time versus part-time, etc.) • Peaking characteristics • Operating and performance standards Management Contracts • Condition of the facilities • Potential for non-aeronautical revenue enhancement • Potential for operational efficiencies • Utilization of the facility and capacity to accommodate additional demand • Amount of vacant space Developer Financing and Operation • Scope of the transaction (one or more cargo buildings, ter- minal building, parking facilities, etc.) • Responsibility for airside development and operations • Condition of the facility • Utilization of the facility and capacity to accommodate additional demand • Exclusive franchise or competing facilities (other terminals, cargo facilities, parking facilities) • Degree of competition from other on-airport facilities or alternative airports or other transportation forms • Availability of tax-exempt financing • Credit market conditions • Availability of PFC revenues Full Privatization (Inside or Outside the APPP) • Facility attributes – Multiple airport system or group (e.g., BAA in United Kingdom) versus single airport (e.g., Midway) – Condition of the facility – Utilization of the facility – Capacity to accommodate additional demand (airside, landside) – Degree of technological innovation – Undeveloped land potential • Capital investments and funding – Level of investment required, including capital invest- ments (CapEx), working capital, unfunded pension liabilities, etc. – CapEx triggers or mandated capital improvement program – Capital structure and ability to access tax-exempt debt – Credit market conditions and competing investment opportunities – PFC level and capacity – Return on asset base (RAB) • Pricing power or constraints to pricing – Level of existing aeronautical charges (cost per enplane- ment or CPE) and contractual, regulatory, and practical potential to raise fees – Dependence on volume-based fees – Other aeronautical contractual agreements and associ- ated terms – Non-aeronautical revenue per passenger – Constraints on non-aeronautical charges such as price caps or contractual agreements – Competition from off-airport vendors (parking, hotels, etc.) – CFC level • Potential for operational efficiencies and operating expenses per passenger • Underlying demand characteristics of the market, including: – Strength and diversity of the local economy – Business versus leisure oriented market – Demographics and income levels of the passenger base (population, employment base, unemployment rates, personal consumption, wealth levels, construction, and housing market conditions) – Enplanement base and volatility – Origination-destination (O&D) versus connecting passengers – Presence, scale, and potential for international passen- gers (gateway airports) – Degree of competition from alternative airports or other transportation modes – Airline diversity (versus domination by single airline) – Financial condition of dominant airline(s)

70 – Prominence of low-cost carriers versus legacy airlines, etc. – Aircraft operations – Cargo tonnage • Other business terms and conditions – Length of lease or concession – Deed restrictions – Value of unamortized AIP grants and potential need to repay the grants – Shareholder structure and percentage of control offered to private sector – Detailed performance standards and associated penal- ties and incentives – Inherited collective bargaining agreements – Requirements to comply with government’s procure- ment rules – Other external regulations (e.g., passenger volume cap, slot rules, noise rules, nighttime curfew) – Breakup or clawback terms 8.6 Financial Metrics In attempting to value a transaction, it is important to con- sider the airport’s ranking in a range of key financial metrics. The objective of this exercise is to investigate how a private entity would look at the opportunity, and what levers they could pull to enhance value. Financial metrics for service contracts depend upon the nature of the contract, economies of scale, skill set and train- ing, and compensation comparisons between public and private sector employees. The appropriate metrics should be carefully tied to the service quality standards desired. Measurable performance standards should be built into contracts as well as incentives for exceeding standards and penalties for underperforming. Financial metrics for airport-wide management contracts can be difficult to estimate as described under the Indianapolis case study in Chapter 9 and Appendix H. Quantifying effi- ciency gains and revenue enhancements can be challenging in part due to defining a baseline and separating out the effect of changes in traffic, implementation of capital improvements, differences in inflation between baseline projections and actual experience, changes in expenses due to legal and accounting mandates, etc. Nevertheless, specific targets can be set regard- ing financial results, safety and security, customer service, operation and maintenance, and capital program management to evaluate performance on an annual basis against the base- line under public operation. As experienced in Indianapolis, it becomes harder and harder over time for the contractor to realize increasing savings. Financial metrics for developer financing and opera- tion depend on the type of facility. For passenger terminals, annual metrics could include operating expense per enplaned passenger, airline cost per enplaned passenger, concession revenue per passenger, customer service, and cash flow (if the airport owner shares in the net revenue). The cost to deliver the project can be compared to the cost of development by a public airport owner for a comparable facility (e.g., cost per square-foot) after making sure the comparisons include the same project elements (e.g., turn-key versus tenant-financed finishes and equipment) and are adjusted for construction time period. For example, construction costs declined con- siderably after the financial crisis in 2008. For full privatization, the financial metrics used relative to peer airports include: • EBITDA77 margin • EBITDA per passenger • RAB • Airline Cost Per Enplanement (CPE) • CPE rank • Non-aeronautical revenue per passenger • CapEx per passenger • OpEx per passenger A variety of valuation methodologies are employed: • Cost-based methodologies, including historic cost and depreciated replacement cost • Value based methodologies, including fair market value, net present value, and deprival value • The concept of opportunity cost, representing the amount lost by not using the resource in its best alternative use • Optimization—to remove inefficiencies that exist in the current asset configuration such as non-productive assets, duplication, excess capacity, and or redundant assets Different options can be considered appropriate for valu- ing different categories of assets. Table 8.6 summarizes how a private consortium would view a potential airport investment opportunity (non-aeronautical revenues would be generally viewed as the area with the high- est potential for value enhancement, as these revenues are less regulated, providing a relatively high degree of flexibility) and often are not fully exploited by public authorities. The drivers and associated potential to enhance value for each metric are likely to be different depending on the underlying structure of the privatization arrangements. For example, duty free revenues would be influenced by the level and nature of international passenger departures and by the current spend rate per passenger (as well as the forecast impact of spend rates associated with enhancements to the duty free shopping experience that the private operator could undertake). 77Earnings Before Interest, Tax, Depreciation, and Interest (EBITDA).

71 Table 8.7 illustrates that there are limits to increasing non- aeronautical concession revenues depending on the profile of the airport. For example, the operator of a small hub air- port cannot be expected to develop a concession program on par with that of a major international gateway. Similarly, an airport with an older, less efficient terminal cannot pro- vide the concession space needed to take full advantage of the market. Airports that have predominantly short-haul flights will realize lower passenger spend rates than airports with long-haul flights because passengers making long-haul trips tend to arrive sooner, spend more time in the terminal, and make more retail and food and beverage purchases for use or consumption during their trip. Aeronautical revenues would often be considered as the area with the least potential for value enhancement because this revenue category is regulated and, in the United States, covered by an airline lease and use agreement or the U.S.DOT Rates and Charges Policy (the Policy). The Policy requires that rates and charges levied on airlines for services and facilities at U.S. airports be “reasonable” and that airlines cannot be subjected to “unjust discrimination” in fees and operating conditions, unless otherwise agreed to by the airline. It also has required historical cost pricing for airfield fees. Any airline that is not a signatory to an agreement may challenge the fee under the Policy if the airline believes the rates imposed by the airport owner do not meet these requirements. However, under the APPP where aeronautical rates are subject to caps, there is the potential to increase aeronautical revenues by increasing traffic. Operating expenses would generally have moderate poten- tial at least in the short-term period; there may be operating Value Driver Potential for Value Enhancement Aeronautical revenues – Landing fees – Terminal rentals Low potential – often subject to cap, regulation Value comes from increased operations, maximum take-off weight Non-aeronautical revenues – Retail – Food/beverage – Duty free – Public parking – Rental cars – Commercial development Highest potential – opportunities for innovation Promote airport user discretionary spending (duty free, retail, parking) Negotiation of favorable business arrangements Proactive commercial development Operation and maintenance expense – Staff – Utilities – Contract services – Equipment/material Limited-medium potential – usually within imposed constraints Staff reductions usually subject to limitation Opportunities for efficiency and productivity improvement Outsourcing potential Renegotiated supply contracts Table 8.6. Valuation drivers and potential for valuation enhancement. Factor Terminal configuration Average trip length International versus domestic Passenger dwell time Originating versus connecting Purpose of travel Passenger demographics Traffic peaks Location of concession space Quantity of concession space 1 2 3 4 5 6 7 8 9 10 Multiple flows Short haul Domestic Short Connecting Business Lower average income A few, concentrated peaks Indirect exposure to passenger flows Constrained Single flow Less Demand / Sales More Demand / Sales Long haul International Long Originating Leisure High average income Traffic evenly distributed Direct exposure to passenger flows Commercially optimized Source: LeighFisher, ACRP Report 54: Resource Manual for Airport In Terminal Concessions, November 2011. Table 8.7. Factors affecting concession program demand and performance potential.

72 cost reductions that could be made, but airport privatization transactions often carry staffing level constraints, such as not abrogating labor agreements that would limit a private opera- tor’s flexibility. Another business plan metric, such as demand for janitorial service in the terminal, would vary somewhat with passenger levels but is more affected by changes in ter- minal space. For example, a 10% increase in passengers using a terminal may call for but a 2% increase in the number of janitors. A new terminal expansion that increases terminal space by a significant amount would likely need a significant expansion of janitorial staff. Other key financial and business plan metrics include capital structure, leverage levels, and expected return on investment. The largest value driver is passengers because the incre- mental cost to handle one passenger is a small fraction of the incremental revenues contributed by that passenger. 8.7 Risks and Mitigants There can be measures taken to mitigate most of the risks to privatization strategies. From an airport owner’s perspective, some general guidelines for mitigating risk include the following: • Develop a master plan and investment plan for the conces- sion term • Establish performance and quality of service standards • Forbid the private operator from selling the lease for at least five years • Make sure the risk/reward ratio is attractive and well-defined • Contractually allocate risks between the government and the private sector • Allow for efficient and reasonable infrastructure devel- opment requirements for which the users are willing to acknowledge and pay the costs • Conduct a simple and transparent process for the bidding with clear evaluation criteria • Carefully think through specifications for the contracts • Clearly spell out rules for extending or renegotiating con- tracts, if any Tables 8.8 to 8.11 summarize specific opportunities, key stakeholder concerns, and potential mitigating measures Stakeholder Opportunities Risks/Concerns Mitigating Measures Policy Makers Retain control over the airport assets (e.g., prices, CapEx, levels of service, noise mitigation, etc.) Provide opportunity for operational efficiencies and cost reductions Loss of civil service jobs Less control over performance and level of service Consider requiring contractor to hire airport employees Include strong performance and service standards in contract U.S. Airport Management Reduce airport costs for employee salaries and benefits Allow airport management to focus on core and strategic issues Retain airport oversight of contracts to ensure compliance with airport goals De-politicize the provision of services (e.g., concessions) Could involve organizational disruption (i.e., reassign or terminate existing employees) Could encounter labor resistance Quality of products and services and customer satisfaction Level of capital investment and sufficiency of maintenance Plan in advance – avoid hiring full-time employees for this function Keep employees advised of plans and potential for their employment by contractor Provide for termination and take-back if performance standards are not met Specify investment requirements and performance standards Airlines Reduce airline costs to operate at the airport Provide greater predictability and stability in rates Ensure efficient airline operations Provide opportunity for airline equipment maintenance or fuel system consortia Contractor meets stated operating and service standards Service disruptions Negotiate detailed operating and performance standards in service contract Make selection based on proposals, not lowest bid Include strong indemnification provision Federal Regulations Compliance with federal laws and regulations by owner and its contractors Monitor compliance Private Contractors Make a profit Increase depth and breadth of company Can be hard to monitor Can be problems with service quality Negotiate performance-based contracts that hold contractors accountable for meeting specific quality service standards Lenders n.a. n.a. n.a. Investors n.a. n.a. n.a. Rating Agencies Reduce operating expenses Increase nonairline revenues New, untested technology and potential disruption to operations Avoid untested new technology Labor Be hired by the private operator Protection of existing civil service jobs Violation of collective bargaining agreements Work with airport management to minimize impact Negotiate changes to agreements if possible Passengers Improve customer service and the passenger experience for business and leisure travelers Improve access to a wider variety of concession opportunities and amenities Reasonable pricing Maintaining high levels of safety and security Retain owner approval rights over pricing Establish price controls (e.g., “street pricing” for concessions) Table 8.8. Service contracts—stakeholder views, risks, and mitigants.

73 Stakeholder Opportunities Risks/Concerns Mitigating Measures Policy Makers Provide better service at the same or reduced cost Attract new airline service and encourage economic development by reducing airline costs through increased nonairline revenues and reduced operating expenses Improve customer service and quality Improve the expertise and diversity of airport staff Improve the airport’s long-term competitive position Retain a significant degree of control over the airport assets (e.g., prices, CapEx, levels of service, noise mitigation, etc.) Operator focuses on maximizing its fee at the expense of customer service Ensure fair and equitable treatment of existing airport employees Involves considerable time and effort for bidding process Delegates a significant degree of control over airport operations Tie compensation to each goal not just reduction in airline costs Consider contracting with multiple firms specializing in each area in which improvement was targeted Require private operator to offer comparable employment to current airport employees and/or require that the owner offer alternative jobs to those employees who do not go to work for the operator Invest time upfront for first transaction so renewal or rebidding takes less time Retain controls over key functions (police, fire, noise mitigation) Include performance oversight standards for the private operator in the lease Limit term to 10 or 15 years, which also is needed to meet “qualified management contract” test under IRS regulations U.S. Airport Management Provide greater incentives for m anagement and employees to perform better Ability to maximize efficiency and improve performance based upon private operator’s work at other airports Might provide relief from cumbersome public procurement rules and social policy mandates and permit airport to operate more like a business than a unit of government Can streamline and improve certain processes Airport owner retains control over capital development and other key decisions Could involve organizational disruption (i.e., reassign or terminate existing employees) Difficult to truly measure performance for the purpose of justifying compensation Tracking contract compliance can be a time consuming and substantial undertaking for the airport owner Require operator to offer employment to airport employees Assess effectiveness and economics of contracting with multiple firms specializing in each area in which improvement is targeted (e.g., ARFF, parking, fueling, fixed base operations) Use metrics to gauge performance that are transparent and easily measurable and tie compensation to each goal the owner is trying to achieve (e.g., lower costs, enhanced nonairline revenues, improved customer service, new air service) Airlines Reduce airline costs to operate at the airport Maintain capital proj ect approval (“majority-in-interest”) rights Provide greater predictability and stability in rates Ensure efficient airline operations Ensure that any monies generated on airport remain in the airport system and are not diverted to other purposes Provide opportunity for airline terminal equipment maintenance and fuel system consortia Ensuring contractor meets stated operating and performance standards Once initial efficiencies are attained, it becomes increasingly difficult to attain further improvements and realize the full value of the management fee Control private operator’s management fees and limit airport revenue taken off the airport Negotiate detailed operating and performance standards Rebid the contract periodically Federal Regulations Ensuring airport and its operator abide by and comply with federal laws and regulations Include terms requiring the private entity to conduct its activities consistent with the grant assurances and other federal obligations imposed on the owner and that the management agreement itself be subordinate to the grant assurances Execute separate agreements for airport management functions and aeronautical activities to be conducted by the private entity Private Contractors Make a profit Position the contractor to transition to full privatization at the airport Provide opportunity to sell other services, such as planning and construction management at the airport Establish good relationships with primary tenants For airport-wide contracts, limited opportunity to earn good returns Diverts management attention for other more profitable ventures Strong performance on a high-profile project may influence the chances for subsequent business Gain U.S. experience that would position the contractor well for full privatization opportunities elsewhere in the U.S. Lenders n.a. n.a. n.a. Investors n.a. n.a. n.a. Rating Agencies Reduce operating expenses Increase nonairline revenues Enhance management expertise Transition risk Hire operator with good reputation and proven experience Allow for ramp up time Table 8.9. Management contracts—stakeholder views, risks, and mitigants. (continued on next page)

74 Stakeholder Opportunities Risks/Concerns Mitigating Measures Labor Be hired by the private operator Learn specialized skills from national or global company Protect existing civil service jobs Violation of collective bargaining agreements Require private operator to offer comparable employment to current airport employees and/or require that the owner offer alternative jobs to those employees who do not go to work for the operator Require operator to agree to appropriate procedures to protect the rights of employees to organize to engage in collective bargaining Passengers Improve customer service and the passenger experience for business and leisure travelers Improve access to a wider variety of concession opportunities and other amenities Reasonable pricing Maintaining high levels of safety and security Retain approval rights on all rate increases Include operating and performance standards in lease agreement with private operator Conduct quality of service monitoring Table 8.9. (Continued). Table 8.10. Developer financing/operation—stakeholder views, risks, and mitigants. Stakeholder Opportunities Risks/Concerns Mitigating Measures Policy Makers Retain some control over most airport assets Increase operational efficiencies and revenue enhancements Preserve financing capacity Reduce reliance on municipal debt Attract private financing Transfer financial risk exposure for cost overruns, delays, and debt repayment to the private sector Deliver a functional facility on time and on budget Improve service quality Ensure fair and equitable treatment of existing airport employees Could involve buyouts and compensation for existing public workers Requires considerable upfront planning, time, and expense Loss of control over pricing, capital investments, levels of service and maintenance Loss of control over the site and the flexibility to respond to changing market conditions Potential need to repay federal grants Ensure a smooth transition from public to private management in a timely manner Involves long-term risk if the project encounters financial problems, especially under LLC model Require private operator to offer comparable employment to current airport employees and/or require that the owner offer alternative jobs to those employees who do not go to work for the operator Include price controls, capital investment requirements, performance and maintenance standards Maintain control over key services such as terminal concessions (e.g., Boston) or terminal advertising (e.g., New York) Include provisions allowing for the recapture of underutilized space (see Boston Terminal A case study) Include provisions allowing for redevelopment of the site subject to certain conditions and repayment Replace AIP-funded assets in kind, coordinate with the FAA early Have a good transition plan in place Include acceleration clauses in event of default Require GMP construction contract supported by performance bonds Require completion within set time period Require equity investment Require bond insurance Include default recapture language in agreements U.S. Airport Management Preserve public capital for those areas where public funding is the only alternative Minimize construction risk and management oversight Apply private sector techniques to Involves considerable upfront planning, time, and expense Requires that the project have a revenue stream to repay the debt Less airport control over the project and delivery of quality facility Has potential to deliver project faster Use for projects that have revenue stream Require developer construct project to airport’s specifications accelerate project delivery and reduce construction costs Reduce operating expenses and increase operational efficiencies due to (a) avoidance of public procurement processes and (b) private sector motivations and incentives Reduce operational responsibilities Permit airport management to focus on other strategic issues and assets Negotiate clear, well-understood agreements, including a development agreement, lease agreement, and GMP contract Invoke a shared understanding of the goals of the project and familiarity with the underlying contractual documents Have regular communication among the key stakeholders Include incentives for achieving goals combined with penalties for failure to perform

75 Table 8.10. (Continued). (continued on next page) Stakeholder Opportunities Risks/Concerns Mitigating Measures Need to repay the Federal government for the value of grant-funded capital improvements Bond indenture constraints Potential impact on tax status of outstanding bonds Loss of control in event of default Require developer to replace AIP-funded assets in kind Get guidance from bond counsel on ways to protect tax status and include in documents Design lease to fit the parameters of a “true” lease as opposed to a “financing” lease if tax-exempt financing used Airlines Reduce airline costs and increase operational efficiencies by avoiding public procurement processes and by private sector motivations and incentives Reduce airline costs to operate at the airport Provide greater predictability and stability in rates Ensure developer meets stated operating standards Ensure efficient airline operations Predictability and stability in rates if the airline is not the developer Include strong operating and service performance standards in the lease with the private operator Could involve organizational disruption and need to reassign or terminate existing employees Require private operator to offer comparable employment to current airport employees Loss of key revenue streams under parking and cargo privatization Retain control of and revenues from terminal concessions Potential competition with airport facilities Limit uses under agreement Loss of control over future capacity expansion and flexibility to change land uses over period of lease Less control of facility utilization and management Less control over types of activities and quality and appearance specifications, schedule, costs, and change orders, and (3) specify materials standards, sizing requirements, sustainability, and concession space Include provisions allowing for redevelopment of the site subject to certain conditions and repayment Include limits on uses and require conformance with airport quality control standards Include provisions allowing for the recapture of underutilized space (see Boston Terminal A case study) Include provision to relocate all operations to a qualifying replacement premise on airport (see BOS Terminal A) Include performance oversight standards for the developer Federal Regulations Ensure airports abide by and comply with federal laws and regulations, in particular the self-sustaining assurance to insure the payments to the private developer do not exceed the fair and reasonable value of its services or otherwise fail to comply with the revenue use policy Loss of control over future capacity expansion Include safeguards in the lease to preserve the owner’s control over the actions of the operator that might affect compliance with AIP grant and PFC assurances Include provisions allowing for redevelopment of the site subject to certain conditions and repayment Private Developers Earn profit on development fees and ongoing operation of facility Gain U.S. experience to position the company well for full privatization opportunities in the future Establish good relationships with potential tenants Lack of clear and transparent solicitation process Obligations to finance ongoing CapEx Potential that project is not implemented after spending considerable time and effort on solicitation Cost and limited availability of bond insurance Potential company is not selected and spends considerable time and effort Conduct transparent process on a credible timetable Provide clear project specifications and ongoing responsibilities Vet political, legal, economic, and financial feasibility of the project before soliciting interest Consider backstopping the project in the early years Provide clear selection criteria Potential that the project turns out to be unsuccessful and affects the developer’s reputation Select developer that has strong experience with similar projects Develop design guidelines to (1) document the minimum acceptable standards, (2) address review and approval of plans,

76 Table 8.10. (Continued). Stakeholder Opportunities Risks/Concerns Mitigating Measures Investors Invest in a sector with substantial growth opportunity Risk of bankruptcy and loss of investment Select developer that has strong experience with similar projects Require material levels of direct equity investment or guarantees from developer Rating Agencies Expand capacity to accommodate higher levels of traffic Potential for project to generate adequate cash flow to pay bondholders Completion and delay risk Traffic risk Select developer that has strong experience with similar projects Require material levels of direct equity investment or guarantees combined with covenants to retain adequate capitalization (liquidity and reserves) Require parent support or guarantee Select developer with history of support for investments Mandate minimum ownership and change of control covenants through life of debt Require GMP or contractor retentions, penalty payments, and liquidated damages Hire experienced developer who can attract service Characterization of lease as a “financing” lease vs. “true” lease Obsolescence risk Debt structure risk Loss of key revenue streams to owner under parking and cargo privatization Draft legal documents properly to avoid this characterization Require continued capital investment in facility over life of lease Require level annual principal and interest payments and reserves Maintain strong debt service coverage on outstanding revenue bonds Labor Opportunity to be hired by the private operator with higher pay Ensure no decrease in salaries and benefits Retain years-of-service credited towards pension requirements Maintain the stability and protections Require offers of employment by developer under substantially similar terms and conditions as government Require operator to provide retirement program (e.g., 401(k) or defined pension plan) Prohibit abrogation of existing collective otherwise provided by government jobs bargaining agreements Passengers Improve customer service and the passenger experience for business and leisure travelers Improve access to a wider variety of concession opportunities and other amenities Reasonable pricing Maintaining high levels of safety and security Set reasonable conditions on rate increases Include operating and performance standards in lease agreement with private operator Conduct quality of service monitoring to ensure that airport operators do not degrade service standards as a means of reducing costs and increasing profit Lenders Lend in a sector with substantial growth opportunity Nonrecourse financing entails a risk if the developer is an LLC or has limited assets to guarantee the investment Require level annual principal and interest payments and reserves

77 Table 8.11. Full privatization—stakeholder views, risks, and mitigants. Stakeholder Opportunities Risks/Concerns Mitigating Measures Policy Makers Raise money to fund municipal budget deficits, pension deficits, infrastructure development, and other general purpose needs Reduce public debt Encourage economic development Allow for higher infrastructure investment in airport facilities by providing access to private capital for airport improvements and development Transfer financial risks to private sector Increase operational efficiencies and revenue enhancements Increase passenger traffic and air service to boost local employment and visitor spending Shrink the size of government and promote ideological interest in increased private sector participation Focus on core services of government (public safety, education, etc.) Requires considerable upfront planning, time, and expense Retaining high level service and operating standards Loss of a significant degree of control over the airport assets Fair and equitable treatment of existing airport employees Potential need to repay federal grants and therefore reduce the net cash payout Exposure to residual risks and liabilities from the process Consider risks and reward before deploying too many resources Include strong operating and service performance standards in the lease with the private operator Retain controls over key functions (police, fire, noise mitigation) Require operator to develop annual capital asset maintenance plan, capital improvement program report, and 5-year capital improvement program for owner’s approval Require private operator to offer comparable employment to current airport employees and/or require that the owner offer alternative jobs to those employees who do not go to work for the operator Require operator to maintain wages at levels comparable to those of other government employees Require operator to agree to appropriate procedures to protect the rights of employees to organize to engage in collective bargaining Coordinate early with FAA headquarters on potential exposure and means to avoid repayment Form a team with technical advisors that have experience with complex legal, financial, operational, and regulatory issues Make sure the goals are always transparent and well-articulated to help minimize resistance to the transaction Get key stakeholders on board early (including labor and airlines) to maximize the potential for success Get strong political commitment to achieve privatization Develop and implement a coherent and integrated strategy with reduced political Protecting the reasonable interests of current and future airlines Ensuring a smooth transition from public to private management in a timely manner Requests to cancel concession contracts Lack of slots under the APPP Reduced ability to maximize value of airport as economic and transportation asset Responsiveness of private operator to community needs and concerns Environmental stewardship interference and increased transparency Require winning bidder to post earnest money Negotiate a long-term airline agreement with the carriers Have a good transition plan in place Carefully manage public perception Forbid the private operator from selling the lease for 5 years Align the interests of the private company with the appropriate incentives Consider opportunity while slots remain available Align the interests of the government and operator Establish an airport advisory commission and require the operator to meet with the commission on a regular basis (see SWF) Include strong environmental compliance provisions and enforcement penalties in lease Maintain control of noise mitigation U.S. Airport Management Provide an opportunity for the government to cash-in on a government-owned asset (minority view) Provide relief from cumbersome public procurement rules and social policy Concern that elected officials might sell or lease airports for the wrong reason Provide for the best interests of the tenants, passengers, and community over the long-term Loss of management jobs Conduct workshops with elected officials on the pros and cons of this model Include strong operating, service, and CapEx performance standards in the lease with the private operator mandates to operate airports more like a business than a unit of government Concern that 65% airline approval entails too many concessions Consider full privatization outside APPP (continued on next page)

78 Stakeholder Opportunities Risks/Concerns Mitigating Measures Lack of access to tax-exempt debt by private operator driving up the cost of capital Ability to shift ultimate risk to operator and likelihood of continued involvement and responsibility No guarantee that the private airport A llow for short-term financing to permit the operator to exploit the low end of the yield curve Require operator to invest a material level of equity A lign the interests of the private company operator w ill achieve financial success, retain interest in the business, or be successful in its execution with the appropriate incentives Airlines Provide greater predictability and stability in rates Best suited for airports that have less operational independence and more challenging governance structures Prefer deal structured with annual payments where all parties benefit if the airport grows Shift economic risk from airlines to operator Controlling and minimizing increases in and greater predictability of airport charges Efficient airline operations Certainty regarding the availability of gates and other facilities for their operations Drive for profit maximization will come at the expense of airline profits and consumer welfare Abuse of monopoly position Reduced investment in aeronautical infrastructure and priority to invest in commercial revenue infrastructure Limit future airline rate increases to inflation adjustments Grant the airlines approval rights for capital improvement costs to be included in airline rates Include strong operating and service performance standards in the lease with the private operator Negotiate gate and space protocols in airline agreement Require operator to make capital expenditures to maintain and develop the airport Require guarantees that the airport will be run in a customer service friendly fashion, with a particular focus on pricing controls Give the airlines sign off rights on the bidders' qualifications Require operator to provide annual capital asset maintenance plan, capital improvement program report, and five-year capital improvement program to the airlines Federal Regulations Compliance with federal laws and regulations, including grant assurances, environmental regulations, revenue use policy, and the rates and charges policy No revenue diversion except as permitted under the APPP78 and determining a reasonable rate of return Satisfying the 9 statutory conditions under the APPP Monitor airports to ensure they comply with federal laws and regulations Issue order or guidance on specific requirements and terms Establish rules for reasonable rate of return Encourage potential APPP applicants to meet with FAA staff early and often Justifying exemptions granted under the APPP May be subject to investigation by the Committee on Foreign Investment in th e United States (CFIUS) Confer with applicants and Congressional representatives Private Airport Operators Increase efficiencies from being able to m anage all employees and do more contracting out Engage in procurement faster and more efficiently (for operations and CapEx) Exploit nonairline commercial opportunities Complying with the owner’s M/WBE and related ordinances Retaining existing public service employees and collective bargaining agreements Limitation on aeronautical charges, which could reduce the flexibility of the Minimize requirements imposed on lessee Give employees the option to remain with the government Allow operator to negotiate future labor agreements Limited due to restrictions in APPP Consider full privatization outside APPP Maximize utilization of terminal space, including new technology to move passengers more efficiently and minimize the amount of space needed Leverage experience and expertise gained from international airport privatization Gain U.S. experience that would position the company well for similar opportunities in the future Private operators have more flexibility to incentivize employees (e.g., operator to set charges, and hinder its ability to respond to specific new opportunities Non-negotiable and restrictive airline use and lease agreement Giving airlines a veto right over new assets (which may be used in practice to inhibit competition, e.g. in the case of facilities for low-cost carriers) Unfunded government mandates and take-backs Confer with potential private operators before concluding airline lease negotiations Negotiate exclusions in MII provisions in airline agreement Provide ARFF and security activities paid for from a fund set aside from lease award proceeds (see Midway) Table 8.11. (Continued). 78The APPP permits U.S.DOT to grant an exemption from the prohibition on revenue diversion “to the extent necessary 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, it is uncertain whether FAA would permit a private operator in such circumstances to derive a rate of return on its investment in the airport.

79 Stakeholder Opportunities Risks/Concerns Mitigating Measures bonuses, succession programs, and training), can use employees for a wider range of disciplines, and are not burdened by public processes Financial return may be limited due to FAA provided exemption from the revenue use assurance, under the APPP Access to AIP grants Inability to levy a PFC except under the APPP Significant benefit to government Consider the APPP where entitlement grants and discretionary grants remain available (at 70% federal share for discretionary) 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 Privatization outside the APPP may permit the imposition of charges on passengers None ownership under the U.S. regime Burden of the grant assurances and other obligations on airport sponsors Potential responsibility for ensuring Constitutional protections Include requirements in lease that operator comply with grant assurances with strong penalties Limited Lenders Invest in sector with historically strong cash flow generation and resiliency Be appropriately rewarded (via an interest rate margin) for the risk to provide debt financing Stability of the cash flows generated by the airport Security in the case of default High leverage, i.e. proportion of the airport’s enterprise value funded by debt rather than equity Subordination of the debt, i.e., if the operator has existing debt that ranks higher in priority for claims on available funds Refinancing risk especially if the loan provided has a short maturity Select operator with strong credentials Be comfortable with risk/reward Invest in airports that have limited exposure to traffic risk Require cost-based ratemaking Obtain influence on operating, commercial, financial, and strategic decision making Negotiate priority treatment Require equity investment by operator Negotiate parity debt or higher returns Provide a structure allowing for partial or full deferral of principal Investors Secure long-term investment with strong competitive position -- returns have been profitable in most cases Secure strong cash flows Capture opportunities for commercial revenue growth Achieve savings from operational efficiencies Realize inflation adjusted returns Acquire long-term growth prospects Time and cost of bid process Earnings quality Traffic risks Likely investment required Conduct transparent process for the transaction Provide clear and credible timetable for the process Minimize cost of participating, especially in the initial round Provide access to relevant data to conduct due diligence Access to management team Help promote air service Have reasonable expectations of the value of the transaction Rating Agencies Increase traffic Increase non-aeronautical revenues Reduce operating expenses Operator experience and management practices Liquidity levels CapEx requirements and expected debt financing needed Award lease to strong and experienced operator/lessee Limited Mandate reasonable CapEx requirements and allow operator to maximize the utilization of existing facilities first Capital structure, debt maturities Revenue diversity and stability Ability to raise rates Operating restrictions Dividend policy and history of shareholder distributions Ability to withstand stress tests Need to optimize equity returns may result in a capital structure that is inconsistent with higher credit quality Require equity investment Limited at smaller airports Set reasonable conditions on rate increases Minimize operating conditions within reasonable performance standards Select operator that has strong experience Require strong legal provisions None Table 8.11. (Continued). (continued on next page)

80 Stakeholder Opportunities Risks/Concerns Mitigating Measures Fund pension liabilities and infrastructure investments from lease payments No decrease in salaries and benefits Years-of-service credited towards pension requirements Require Project Labor Agreements for large capital projects Protect workers from wage and benefit reductions Require operator to provide retirement program (e.g., 401(k) or defined pension plan) Passengers Improve customer service and the passenger experience for both business and leisure travelers Improve access to a wider variety of concession opportunities and other amenities Increases in pricing for parking, concessions, etc. Maintaining high levels of safety and security Private operator profit maximization at the expense of consumer welfare and satisfaction Diminished community control Set reasonable conditions on rate increases Include operating and performance standards in lease agreement with private operator Conduct quality of service monitoring to ensure that airport operators do not degrade service standards as a means of reducing costs and increasing profit Retain controls over noise mitigation Labor Work for a private operator with no change in pay/benefits and with incentive compensation and career development opportunities by working for a company with a global network Stability and protections provided by government jobs Loss of jobs and collective bargaining rights79 Require offers of employment by developer under substantially similar terms and conditions as government Prohibit abrogation of existing collective bargaining agreements Table 8.11. (Continued). 79Under the APPP statute, any collective bargaining agreements cover- ing airport employees that are in effect on the date of the sale or lease of the airport cannot be abrogated by the sale or lease. to stakeholder concerns for each privatization model. The tables are not checklists, but qualitative guidance in assess- ing the attributes present in a model and are only part of the evaluation process. As noted earlier, the U.S.DOT/FAA, in its capacity as regulator of airports, is concerned with airport compliance with applicable federal laws, regulations, and policy. We have attempted to summarize relevant aspects of such laws, regulations, and policies in the tables above in terms of federal regulatory risks for each model and provide potential mitigants to be considered by parties to ensure compliance. These are not the views of the U.S.DOT/FAA. In some cases, the concerns expressed by stakeholders rep- resent unintended consequences resulting from attempts to mollify other stakeholders. Such unintended consequences are clearly undesirable, and a major priority should be to minimize the likelihood of such effects to the extent possible and reasonable. In the end, tradeoffs will be required. It should also be noted that the absence of mitigating mea- sures is also a concern, which is indicated by no comment on the summary tables. 8.8 Evaluation Checklist The final step is to evaluate the appropriate privatization models against more specific owner criteria. The privatization initiative should only proceed if there is a sound economic, financial, and legal basis with a high probability of success and support from key stakeholders. From an airport owner’s per- spective, the privatization models can be evaluated in terms of issues and opportunities regarding (1) governance, (2) regu- latory, (3) legal, (4) financial, (5) economic, (6) commercial, (7) labor, (8) customer service, and (9) implementation. In this context, these terms mean: 1. Governance refers to the degree of policy decision making required or control retained by the airport owner. 2. Regulatory refers to rules that are established by federal policies such as grant assurances, Surplus Property Act deed restrictions, Airport Security Program, CFIUS, pro- hibition on revenue diversion, Policy Regarding Airport Rates and Charges, APPP conditions, IRS regulations, etc. 3. Legal refers to external constraints that are established by laws, labor contracts, and financial commitments made to various parties such as bondholders and trustees. 4. Financial refers to the responsibility for staffing, manage- ment, and capital improvements as well as paying operat- ing expenses and debt service, and includes the potential for revenue increases and/or cost reductions. Table 8.12 summarizes the financial responsibilities under each model with respect to staffing, management, and capital expenditures (CapEx). Government operation—the airport owner provides the labor, management, and capital funding. Service contracts—the contractor provides the staffing, the airport owner oversees the performance, and there is no CapEx requirement.

81 Government operation Legend: Operator (government or private) provides Operator (government or private) oversees n.a. Not applicable Model Staffing Management CapEx Private Sector Models Service contracts n.a. Airport-wide management contract n.a. Developer financing/operation Long-term lease or sale Table 8.12. Financial responsibilities for staffing, management, and CapEx. Management contract—the contractor provides the staffing and management, but has no responsibility for CapEx. Developer financing/operation—the contractor contracts out most of the operation, manages the facility, and provides the financing. Long-term lease or sale—the contractor provides the staff- ing, management, and financing of airport operation and development. 5. Economic refers to both enterprise and external impacts. Enterprise economic impacts pertain to the overall econom- ics of the transaction for the airport owner and its tenants. External economics refer to the economic development impacts and associated costs and benefits of the transaction to the community or region served by the airport. Airports create tremendous economic value for the local economy by attracting and retaining industries and creating new jobs. 6. Commercial refers to the profit to be earned by the con- tractor, which is what motivates the private company. The higher degree of commercialization, the higher the level of potential profit over the term of the lease. 7. Labor refers to commitments to existing employees under collective bargaining agreements, local laws, and political acceptance. 8. Customer Service refers to the experience of passengers, airlines, and other tenants using the airport as well as resi- dents living in the vicinity of the airport. 9. Implementation refers to the ability to successfully com- plete the transaction and to derive value from it over the long-term. Table 8.13 provides a provisional evaluation checklist for the airport owner. Issues Yes No n/a Governance Compatibility with goals for future role in airport ownership/management Retention of residual controls for key policy issues Opportunity for local/regional participation Appropriate level of sponsor/public control over policy and operations Ability to implement economic development initiatives Regulatory Compatibility with FAA requirements Requirements to repay federal/state grants Deed restrictions Compatibility with state legal constraints (e.g., police powers, local government charters, municipal authorities, procurement rules, sale or lease of public property) Legal Requirements in collective bargaining agreements Covenants in bond indenture, including release of revenues, ability to meet the rate covenant, long-term lease or sale of property, changes affecting the tax status of outstanding debt Requirements in leases with existing tenants, including airline use and lease agreements Responsibility for environmental liability Table 8.13. Evaluation checklist. (continued on next page)

82 Issues Yes No n/a Financial Financial return to airport owner Potential to improve financial operations of airport Access to federal and state grants Need to refund outstanding debt and associated cost of the transaction Timely access to debt financing for capital improvements and requirements to access tax-exempt debt Financial capacity of private sector partner Economic Ability to implement airport efficiency initiatives Ability to implement more efficient procurement and contracting mechanisms (e.g., purchasing, personnel, contracting) Ability to enhance non-aeronautical revenues Ability to develop facilities and promote air service more efficiently and aggressively Ability to develop the airport in a manner that promotes regional economic development Commercial Requirements to renegotiate airline lease and use agreements Requirements to renegotiate other major lease and use agreements (e.g., terminal concession, parking, rental cars) Ability to increase emphasis on commercial and economic development Labor Flexibility to structure compensation and benefit packages to attract and retain management talent Requirements in collective bargaining agreements regarding placement process for existing employees (e.g., retain, reassign to another public agency, or displace) Labor ties to owner Responsibility for pension liabilities Requirements under state laws on replacement retirement package Obligations under “successor clauses” and ability to renegotiate labor agreements Limitations in state laws regarding outsourcing Need for management continuity and experience and transition issues Customer Service Ability to maintain or improve levels of service Existence of reasonable prices Access to a wide variety of concession opportunities and other amenities Ability to address external impacts and implement mitigation measures (e.g., aircraft noise, ground access) Implementation Implementation risk Implementation complexity/controversy Experience, capability, and financial resources of contractor Long-term value for money Table 8.13. (Continued).

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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.

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.

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