In this issue:
After years of study and political wrangling, the U.K. government last week announced its decision that the much-needed expansion of airport capacity in Southeast England will take place at Heathrow, the country’s largest and busiest airport. The decision was widely expected, given that the government-appointed Airports Commission last year had basically concluded that there would be greater benefit from adding a runway at Heathrow than from adding one at Gatwick—even though the projected cost of the latter was about half the projected $19 billion cost of the Heathrow expansion.
Heathrow is the major hub of formerly state-owned British Airways, and Willie Walsh, CEO of BA parent company International Airlines Group, earlier this year spoke forcefully against the costly runway addition (the cancellation of which would serve to limit future competition with BA at Heathrow). But Walsh seemed comfortable with the government’s announcement, based on an apparent pledge that Heathrow airline charges would not be allowed to increase significantly. And there is still some question as to how much of the $19 billion Heathrow will pay and how much British taxpayers will be charged for ancillary infrastructure such as building a tunnel to shift the M25 motorway underneath the new runway. By contrast, Gatwick Airport has repeatedly stated that it would pay the full cost of its far-less-costly runway addition.
Despite the media hoopla, Heathrow’s new runway is far from a done deal. The government’s next step is a “public consultation” next year, leading up to a final vote by Parliament in the winter of 2017-18. And very likely there will be lawsuits, from local residents whose villages will be acquired (at 125% of market value) for the runway and from various environmental groups that object to any expansion of aviation, period.
The question that must be asked is this: Why is it the U.K. government’s job to dictate which of the three major London airports can add a runway? In the old days, when the British Airports Authority was the owner/operator of Heathrow, Gatwick, and Stansted, the BAA operated as a central planner—allocating a particular type of operation to each of its three airports, with the ability to use excess revenues from one of them to subsidize operations of the others.
This kind of central planning was supposedly discontinued when BAA was privatized by the Thatcher government in 1987. But because that government unwisely privatized the whole shared monopoly as a single company, the central planning mentality continued to some extent. It is only in recent years, with the divestiture of Gatwick and Stansted as separate, independent businesses, that the days of central planning are (at least) officially over. The new model is supposed to be vigorous competition among the three airports—not a centrally managed master plan.
Yet that central planning mindset—to discover and prescribe the “one best way” forward for airport capacity—was the underlying premise of the Airport Commission from day one. The only voice raised against this premise during the past two years was maverick Michael O’Leary, CEO of hugely successful Ryanair. He repeated his critique right up until the government announced its decision last week. At a press conference on September 1st, O’Leary said, “Instead of picking just one, Ryanair is calling [on] Prime Minister Theresa May to approve three new runways—one each at Heathrow, Gatwick, and Stansted—which will finally resolve the runway capacity issue for the next 50 years.”
O’Leary’s point was that these airport businesses are supposed to be in competition to deliver cost-effective facilities for their customers. If the government gave them each permission, “Heathrow will cry like a baby, Gatwick will cry like a baby, and Stansted will probably be the first to start. Then Heathrow and Gatwick will follow, because they would not want traffic to go to another airport. Competition between the airports will keep the cost of those runways down.”
There is one caveat to this scenario, and it’s a big one. The government does have a role to play in defining the noise exposure standard that runway additions must meet. But if that were defined in performance terms, it would be up to each airport company to come up with a mix of soundproofing, buy-outs and relocations, and airport operating restrictions sufficient to reach a cost-effective solution.
This may sound utopian, but I was pleased to see that my favorite news magazine seconded the motion. In its October 15, 2016 issue, The Economist wrote the following:
“Yet even after the bulldozers get going on Heathrow’s new landing strip, the government should leave the door open for other airports, including Gatwick and Stansted, to build new runways. Demand for air passenger travel is growing far faster than Sir Howard’s forecast, says Nick Dunn, Gatwick’s chief financial officer. This year Gatwick will handle as many passengers as the Airport Commission predicted it would in 2034. A new runway is already needed if it is to increase its capacity at peak times. The airport’s owners want to press ahead with one even if Heathrow gets the nod. It would be no bad thing for Heathrow to face the added competition.”
Around the country, the Federal Aviation Administration is implementing its Metroplex program, applying some of its NextGen air traffic technology and procedures to simplify arrival and departure routes. The goal is shorter and more-precise flight tracks, along with low-power “continuous descent approaches,” to reduce fuel consumption, engine emissions, and noise impact. In a macro sense, all those things are achievable. But as communities around the country are discovering, more-precise flight tracks concentrate the noise impact over fewer properties. This reduces noise for many people, but can significantly increase it for those who live or work under the new flight tracks. The intent certainly is to have far more winners (less noise) than losers (more noise). But since the losers are the ones complaining, the public and their elected representatives hear mostly that there is now a worse noise problem than before.
And that disparate impact is being exaggerated further by a phenomenon documented by two researchers at the Mercatus Center at George Mason University in Virginia. In “Airport Noise and NIMBYism,” Eli Dourado and Raymond Russell analyzed the noise complaints logged by citizens at nine major U.S. airports. In nearly every case they found that a handful of people were responsible for huge fractions of total complaints. Some examples:
And some of them were people located a long way from the airport in question:
And this is not a totally undiscovered phenomenon. Two years ago, Chicago Tribune reporter Stacy St. Clair wrote “Confessions of O’Hare’s Record Noise Complainer,” documenting the case of Dawne Morong who often filed a hundred noise complaints per day, and alone accounted for one-third of all O’Hare noise complaints in August 2014.
I’m glad to see such excesses being documented, and hope that airports suffering noise complaints will henceforth analyze their data more carefully before being bamboozled by exaggerated claims of horrible noise. But that is not to minimize the genuine adverse impact when the peace and quiet of a neighborhood is shattered by a change in flight patterns that brings a substantial increase in noise that is beyond accepted standards. Those are not cases of “you knew the airport was there when you moved in”—because in these cases, the noise moved in on them after they were already there. People such as these are being genuinely harmed, and deserve compensation—whether it’s major sound-proofing, buyout and relocation, or a monthly noise compensation payment. For airports, such compensation should be a normal cost of doing business.
Canada’s relatively new Liberal government continues to advance its “asset recycling” agenda, under which it would privatize major state-owned assets and enterprises and use the proceeds for investing in infrastructure. On airports specifically, in October the government announced a contract under which investment bank Credit Suisse will review and assess the airport privatization options, studying each of the eight largest airports individually, and report back to Finance Minister Bill Morneau by year-end.
But the airport privatization effort thus far has the support of only one of the eight nonprofit airport authorities—Aeroports de Montreal. The CEOs of three others—Calgary, Ottawa, and Vancouver—have published op-ed pieces largely defending the status quo, as has the president of the Canadian Airports Council. What can we make of these conflicting claims?
It’s clearly the case that the transfer of control of the 22 largest commercial airports from the federal government to newly created local airport authorities in the early 1990s led to improved airports (just as the transfer of Reagan National and Dulles International from our federal government to the newly created Metropolitan Washington Airports Authority in 1987 did). Canada’s commercial airports were largely freed from politicized governance, and they gained the ability to charge passengers an Airport Improvement Fee whose revenue stream can be bonded (like PFCs in the United States). Using their new freedoms, the airports expanded and improved their facilities and began modernizing their retail concessions.
However, all Canada’s commercial airports resent having to pay annual rent to the federal government (which retains ownership of each airport) based on a percentage of gross airport revenue. Since 1992, the airports have paid over C$5 billion in rent to the government, far in excess of the book value of the assets they manage. And that de-facto tax will continue for all the remaining years of the 60-year leases. For years the airports have been citing this tax as one reason why many Canadians cross the border to fly out of nearby U.S. airports instead.
Privatizing the airports, using any of the several models in widespread use around the world, offers one way to terminate that rent. Indeed, if the airports were either sold outright (as in most European privatizations) or leased under long-term concession agreements, the feds would typically get a one-time lump sum in exchange, and each airport company would begin to operate as a normal commercial business. No longer having the rent expense would cut their operating budgets significantly—rents in 2015 accounted for 33% of the operating expenses at Calgary, 31% at Toronto, 28% at Vancouver, and 27% at Montreal.
The status-quo airports reply that there is no free lunch. The cost of financing the acquisition price would still have to be paid by airport users, which is certainly true. But there is also significant potential for increasing airport revenues to do that. A pro-forma produced by the Calgary Airport assumes no changes in commercial revenue (parking, rental car, food & beverage, and other retail)—a highly questionable assumption given the transformation of airport retail under way worldwide, led by privatized airports. The dissenting airports cite large percentage increases in such revenues since the 1992 transfer, yet a pie chart of annual revenue for the eight large airports as of 2015 shows commercial revenue at just 33% of total—far below the global trend for first-world airports.
Another bald assertion made by privatization opponents is that “privatization would almost certainly have to be accompanied by flat-out economic regulation.” They dismiss with little discussion the “light-handed regulation” that has worked well in Australia since all its major airports were privatized via long-term lease concessions. Positing a cumbersome utility regulatory body creates an easy target, but one that is hardly a given, since we have functioning examples of the alternative in Australia. There is also the example of concession-based limits on rates charged to airlines, as in the long-term lease agreement for the San Juan International airport (which is strangely absent from the Canadian discussion to date). Airlines serving San Juan seem very pleased with the major improvements to the terminals and security facilities since that airport was privatized.
In short, Canada’s eight major commercial airports would likely be improved by privatization, especially if that change of status liberated them from the open-ended, ever-higher annual rent payments to their federal government. Airport companies, airlines, infrastructure investment funds, and pension funds will follow the Canadian debate with interest in coming months.
TSA dodged a bullet over the summer, with much shorter lines over the July 4th weekend than the horrendous mess of screening during Spring Break. This was due to the combined efforts of TSA itself (with some one-time budget help from Congress), airports, and airlines. Congress allowed TSA to shift $62 million into screening for the summer, allowing it to hire and train 1,368 new screeners and convert 1,865 part-timers to full-time. Airlines detailed about 600 employees to help out at checkpoints, and airports provided about 350 full-time-equivalents. All of this helped, but these were all one-time fixes, not built into ongoing budgets of TSA, airlines, or airports. As we near the Thanksgiving and Christmas holiday travel season (with a record 27.3 million passengers expected at airports for the Thanksgiving holiday), it’s unclear how many of these checkpoint people will still be available.
Congressional appropriators have proposed adding $73 million to TSA’s FY 2017 budget, but as yet there are no appropriations for this fiscal year, which began on October 1st. TSA Administrator Peter Neffenger is pushing for a budget increase, as is DHS Secretary Jeh Johnson. They may get it, but since the shape of the new Congress and Administration are unknown as I write this, nobody can be sure.
Two policy changes that could have made a difference for 2017 look doubtful at this juncture. One is the major expansion of PreCheck, which TSA had been counting on to shift a much larger fraction of daily travelers into the faster PreCheck lanes, thereby reducing the lines and waiting time in the regular lanes. That major increase was premised on the eventual success of the agency’s long-planned (but frequently challenged) third-party recruitment effort. The planned 2016 procurement was put on hold last spring due to a lawsuit filed by TSA’s monopoly contractor for PreCheck signups, Morpho Trust. Alas, on October 26th, TSA abruptly cancelled the procurement, citing “concerns about the ability to ensure vendors properly safeguard testing data in light of increased and evolving cybersecurity risk over the past year.” So the time and money spent over the last three years by would-be providers are all down the drain. Needless to say, the next day Morpho withdrew its lawsuit, and it continues to add sign-up locations via additions to its contract with TSA.
The other policy change that should be pursued, regardless of any budget increases, is the sensible proposal from Rep. Bennie Thompson (D, MS). His bill calls for TSA to convert its 2,800 Behavior Detection Officers (most of them former screeners) into regular checkpoint screeners. The BDOs have never intercepted a would-be terrorist, and the scientific validity of their supposed surveillance of passengers has never been demonstrated. This example of TSA mission creep could be easily undone by Congress—and should be.
Last winter Salt Lake City International launched a major change in its aircraft de-icing program. As Airport Business reported (October 2016), SLC made two big changes simultaneously: shifting from terminal-area de-icing to end-of-runway de-icing and shifting from airline-controlled de-icing pads to common-use pads.
I’ve written previously about the gradual change to common-use facilities at U.S. airports. We increasingly see common-use check-in kiosks in ticket lobbies, common-use arrival and departure display boards, and common-use gate equipment (in which the name and logo of the airline appear only electronically, rather than on fixed signage). Common-use facilities reduce unit costs and enable the airport to serve more flights and passengers with a given amount of facilities. Common-use is a near-universal practice overseas at corporatized and privatized airports, and it continues to make headway in this country.
In addition to gaining economies of scale with common-use de-icing, SLC aimed to reduce delays in getting flights de-iced and into the air. At some airports during busy peak times that involve long taxi-out delays, planes sometimes wait so long in line to take off that they have to return to the terminal to be de-iced a second time. Hence, the advantage of having de-icing pads near each of an airport’s runway ends. Since SLC has three runways, the plan calls for six such pads, one near each runway end. Last winter the program began with three pads, and a fourth is due to open this fall.
Last winter’s start-up of runway-end de-icing went pretty well, as related by Airport Business‘s article. One deviation from the original plan was that anchor tenant Delta (for which SLC is a major hub) decided not to participate in common use, though it agreed to shift to the runway-end location. Hence the program began with Delta operating one pad and the other airlines using the others managed by SLC’s Integrated Deicing Service. And that ended up causing a problem, when peak-period DL flights queuing up on a taxiway blocked other aircraft from getting to the common pads. A policy change has been worked out for this winter under which DL will hold planes short of the de-icing pad to prevent blocking the taxiway.
To the best of my knowledge, SLC is the first airport to attempt both common-use and end-of-runway de-icing. The idea appears sound, and the first winter’s results look promising.
Airfares Are Lowest Since 2009. Despite political and consumer-advocate rhetoric to the contrary, airline ticket prices have declined significantly since 2009, and are 10% lower than a year ago. That’s the word from the U.S. DOT, reporting on the April-June 2016 quarter at the end of October. The average domestic airfare that quarter was $353, which was the lowest (inflation-adjusted) fare since the third quarter of 2009. Fuel prices have dropped over 50% since 2014, and competition from ultra-low-cost carriers like Allegiant, Frontier, and Spirit has helped keep fares low.
Brazil Plans Third Round of Airport Privatization. The reformist interim government plans to privatize four more airports within the next year: Florianopolis, Fortaleza, Porto Alegre, and Salvador. This time around, the state airport authority, Infraero, will not retain a 49% ownership stake in the concessions. There will also be no restrictions on foreign ownership, reports Airports International (October 2016). An experienced airport operator must make up at least 15% of the consortium bidding for an airport. Concession holders will pay an annual fixed fee and a percentage of gross airport revenue each year for the full term of the concession. The proceeds will be used to assist development of Brazil’s smaller airports.
Denver OKs P3 Developer Negotiations. The Denver City Council voted 10-2 to authorize Denver International Airport to negotiate the details of a public-private partnership led by Ferrovial Airports aimed at a major revamp of its Jeppeson Terminal. The project will consolidate airline ticket counters, redesign and relocate the TSA checkpoint screening, revamp the checked-baggage system, and redesign the retail shopping areas. The Council also approved hiring the Nossaman law firm as DEN’s legal advisor on the P3 agreement.
JetBlue to Bring New Competition to Atlanta. Delta’s fortress hub at Atlanta’s Hartsfield-Jackson International Airport will see new competition next year when JetBlue returns to ATL in force. In March it will offer five daily round trips to Boston, and will follow those with daily trips to New York’s JFK, Orlando, and Fort Lauderdale. JetBlue had briefly served ATL 13 years ago when it was much smaller and financially weaker. Today it is far better able to compete vigorously with Delta.
San Jose Beefs Up Leaky Perimeter. After the embarrassment of a number of highly-publicized intrusions onto its airfield in recent years, San Jose International Airport in September announced the completion of an improved perimeter fence. Replacing the former six-foot chain link fence is a new 10-foot fence topped with razor wire, with 11-foot sections in “key areas.” The airport is also looking into adding increased video surveillance and motion sensors for the airport perimeter.
Santiago Airport Revamp Reaches Financial Close. The $900 million project to add a new international terminal to the airport of Santiago, Chile achieved financial close at the end of July. The financing included both dollar-denominated and peso-denominated loans from a series of international banks. The consortium that will finance, build, and operate the terminal and manage the rest of the airport consists of Aeroports de Paris, Vinci Airports, and Astaldi.
More Air Marshals Arrested than They Themselves Arrest. A long article on the 15th anniversary of the 9/11 attack by McClatchy reporter Tim Johnson cast a skeptical eye on many aspects of TSA-provided aviation security. Among the interesting facts revealed in the article is that air marshals were arrested 148 times from 2002 through 2012 for various crimes unrelated to their work (revealed thanks to a Freedom of Information Act request by ProPublica). Johnson contrasted this with findings by Rep. John Duncan (R, TN) that air marshals had made an average of 4.2 arrests per year from 2001 to 2010, about which Duncan said “We are spending $200 million per arrest.”
GMR Wins Concession for New Goa Airport. GMR Airports was the winner in a competition for a $700 million, 40-year concession to finance, develop, and operate a new airport—Mopa Greenfield—in North Goa on India’s west coast. Parent company GMR Group owns and operates the airports of New Delhi and Hyderabad and has overseas airport projects in Turkey and the Philippines.
TSA Airport Background Check Missed Killer. All employees of companies working at airports who need access to secure areas must pass a 10-year criminal history background check to be granted a badge they must wear to enter the defined security identification display area (SIDA) of the airport. That definitely applies to catering company staff who bring food and beverage supplies to aircraft at the gate. Unfortunately, an employee of LSG Sky Chefs at Detroit Metro Airport, who had served 16 years in prison for the murder of his first wife, passed the background check. The case came to light in September when the man called 9/11 to report that he had just killed his second wife’s two children. In defending its background check, TSA told the Detroit News reporter that “they look for convictions on various offenses within 10 years of an individual’s application date for a SIDA badge.” Since the man had been released in 2008 after serving 16 years, the 10-year look-back did not show any convictions.
Atlantia Gains Stake in Five Italian Airports. Atlantia, the owner of Italy’s largest toll road network (Autostrade per l’Italia), has purchased a 21.3% stake in SAVE, the concessionaire for four Italian airports (Venice, Treviso, Brescia, and Verona) and Brussels South Charleroi. SAVE was first listed on the Italian stock market in 2005. Atlantia is part of a consortium (with EDF) that won the competition for Nice Airport in France.
Casino Planned for Bradley International in Connecticut. The Connecticut Airport Authority was revealed (in August) to have plans for an on-airport casino of up to 200,000 square feet, doubling the size of the on-airport Sheraton Hotel. The project is estimated to cost $500 million, in addition to the cost of a new Terminal B nearby. MGM Resorts International, which plans to open a $950 million casino resort across the border in Springfield, MA in 2018, has been critical of the airport casino plan.
NextGen for Airports, Volume 2. The National Academy of Sciences has released NextGen for Airports, Volume 2: Engaging Airport Stakeholders: Guidebook. In addition to explaining the implications for airports of the many technological and procedural improvements being implemented by the Federal Aviation Administration’s NextGen air traffic control modernization program, the guidebook focuses on how airports can work with their stakeholders to take full advantage of these improvements. The pdf of this guidebook is available at: http://nap.edu/23684.
“Congress’ haste [in 2001] produced a flawed measure. Air travel security has certainly improved, but problems with wait times, screening lapses, and turnover at the top have been too common. The biggest mistake: TSA handles evaluations of its own performance. This is contrary to both common sense and the recommendations of the International Civil Aviation organization, an agency of the United Nations. Now, with the 15th anniversary of 9/11 drawing near and reports of TSA-related delay problems still persistently in the news, it’s time for lawmakers to begin seriously considering an agency overhaul. We’ve waited long enough.”
—Editorial, “Why Wait Longer to Fix TSA? After 15 Years, It’s Time,” San Diego Union-Tribune, Aug. 5, 2016
“About 450 airports worldwide have been privatized to some degree, including some of the world’s best. Yet privatization has lagged in the U.S. The process is inhibited by the financial benefits that still accrue to public airports, such as the ability to issue tax-exempt bonds. Making things worse, since 2000 Congress has capped the Passenger Facility Charge that airports can use to pay for upgrades. . . Congress could encourage [public-private partnership] projects by offering tax preferences for bonds issued by airport investors. It could also increase the Passenger Facility Charge, or at least index it to inflation.”
—Adam Minter, “What Will It Take to Make U.S. Airports More Competitive?” Skift.com, October 5, 2016
“Buried beneath diplomatic niceties in a paper submitted by ACI Global on behalf of airports [is a proposed] changing of the guard in the relationship between airlines and airports. The airports want to change, ever so slightly, the way slots are allocated. The airports would like ICAO to acknowledge that the airports be involved in the process. . . . The ACI request is very modest. It is nothing more than a request for a toothless tiger’s endorsement of a suggestion they be involved. It is not demanding primary markets for slot allocation; it is not demanding ownership of the slots by the entity that actually makes the slots. It simply notes that times have changed.”
—Andrew Charlton, “Airports: Slotting into the New World Order,” Aviation Intelligence Reporter, October 2016