Considering and Evaluating Airport Privatization (2012) / Chapter Skim
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Pages 63-82
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From page 63... ...
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 considering which solution may be most appropriate under the circumstances.
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64 Specific Strategies Stakeholders Views Goals and Objectives Risks and Mitigants Valuation Drivers Complexity And Risk Figure 8.1. Decision tree filter.
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65 major appeal for this option is the ability to extract a cash outlay 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.
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From page 66... ...
66 and their perspectives on the potential advantages and disadvantages. Table 8.4 summarizes the key interests of each stakeholder group.
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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.
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From page 68... ...
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 outside 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.
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From page 69... ...
69 • Efficiencies on procurement and purchasing functions • Applying commercial business practices • Aligning actions with the needs of different market segments (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.
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From page 70... ...
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 penalties and incentives – Inherited collective bargaining agreements – Requirements to comply with government's procurement rules – Other external regulations (e.g., passenger volume cap, slot rules, noise rules, nighttime curfew)
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From page 71... ...
71 Table 8.7 illustrates that there are limits to increasing nonaeronautical concession revenues depending on the profile of the airport. For example, the operator of a small hub airport cannot be expected to develop a concession program on par with that of a major international gateway.
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From page 72... ...
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 operator'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 terminal space.
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From page 73... ...
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)
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From page 74... ...
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)
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75 Table 8.10. (Continued)
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76 Table 8.10. (Continued)
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77 Table 8.11. Full privatization -- stakeholder views, risks, and mitigants.
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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)
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From page 79... ...
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)
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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)
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81 Government operation Legend: Operator (government or private) provides Operator (government or private)
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From page 82... ...
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)
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