Privatization of Hartsfield International Airport

By Lowell Evjen

Hartsfield International Airport is considered by many to be Atlanta’s most prized public possession and the economic engine that propelled her to prominence as the capital city of the “New South”. Atlanta’s need for funding to shore up its deteriorating infrastructure prompted the Georgia Public Policy Foundation to conduct a study of privatization options for Hartsfield, which would offer the opportunity for both non-political, professional management and would increase revenues for the city.

Background

The ownership and operation of public facilities, be they toll roads, power plants, ocean terminals or airports, are undergoing dramatic changes worldwide. As public budgets are being reduced and the advantages of new technology and operating efficiencies are being sought, increased private sector involvement in owning and/or operating public purpose facilities is a rapidly growing trend. Interest in “privatization” is spreading among both developed and developing nations, with the strongest interest in transportation facilities.

Over the past decade, more than 75 countries have sold state-owned enterprises worth $265 billion -primarily to raise revenue. But they have also done so because they believe the enterprises would be operated more profitably and efficiently and customers would be better served by private ownership and management.

The World Bank has recently completed a study that confirms this belief. The study analyzed 12 industries that were transferred from public to private ownership in Britain, Chile, Malaysia and Mexico. Industries that were sold included airlines, electric utilities, telephone companies, a container port and a motor freight company. The performance of each privatized firm was compared to an estimate of how it would have performed had it remained in government hands. In 11 of the 12 cases, major gains were made in benefits to customers, workers and shareholders, and the overall conclusion was that private ownership can bring major benefits.

Public/Private Partnerships in Transportation

In recent years, the growth in infrastructure needs in the United States has outpaced the growth in available funding by almost two to one. The percentage of our nation’s Gross National Product dedicated to public works spending has declined nearly 50 percent in the past quarter of a century, and a similar decline has occurred in the federal share of the nation’s total spending on transportation infrastructure. At the same time, taxpayers have become resistant to general tax increases at all levels of government in the face of increased competition for public funds from health care, education, corrections, police services and others. Finally, there has emerged a strong taxpayer preference for “user-fee” type financing of public facilities, in contrast to the use of general tax revenues. These trends have led the federal government to take several major actions to assist state and local efforts in implementing the use of user-charge financing for infrastructure:

In 1987, Congress authorized an extensive pilot program for federally-assisted toll roads.

In 1990, Congress authorized local airports to charge a per-passenger fee, which had been previously prohibited.

In the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), Congress opened the financial door to a broad range of private investment options for both toll projects and other types of transportation infrastructure.

Finally, in April of 1992, President George Bush issued Executive Order 12803 establishing federal policy in favor of privatizing infrastructure enterprises that were financed with federal funds, explicitly including airports. The Order requires state and local governments to reimburse the federal government for only a portion of the federal investment in a facility that is sold or leased, and prescribes guidelines for the use of proceeds from the sale or lease. All federal agencies are directed by the Order to revise their policies to be consistent with its terms.

Airport Sales

The concept of privatizing airports originated in Britain. Unti11987, London’s three main airports (Heathrow, Gatwick and Stansted) and four Scottish airports were operated by the former British Airports Authority (BAA). In 1983, the British government decided to privatize BAA by selling 100 percent ownership of it through a public stock offering. The transaction was completed in 1987 and raised $2.5 billion for the national treasury, with Britain retaining a single share of stock and special voting powers.

Though the sale of BAA was not completed until four years after it was announced, the transition toward a commercial operation began almost immediately. In anticipation of the sale, BAA’s work force shrank by several thousand between 1982 and 1985, and productivity increased steadily. Following the sale, capital investment doubled as the new owners expanded terminals and added on-airport hotels. Productivity continued to rise, and the work force grew by over 1,000 as airport traffic increased. Operations of retail concessions were expanded to the point where revenue from those sources now exceeds revenue from airlines and airfield functions. The market value of the shares today is $4.3 billion, almost double what it was when BAA went private six years ago.

Other governments have sold only partial interest in their airports. Liverpool, England sold a 76 percent interest in its airport to British Aerospace; Belgium created a corporation to own the Brussels airport terminal and then sold a 52 percent interest to raise capital for a new facility; and the Austrian government sold a 28 percent interest in the Vienna airport to finance an expansion.

Several other governments have announced plans to sell part or all of their airports. Denmark plans a public stock offering for 25 percent of Copenhagen’s Kastrup airport; New Zealand has privatized its three international airports and plans to sell at least one of them (Auckland); the United Kingdom has announced plans to sell the Belfast International Airport in Northern Ireland; Malaysia and Singapore are privatizing their airports and plan to sell them within the next five years; and Argentina has announced plans to privatize both major airports serving Buenos Aires.

Finally, a number of governments have announced studies on airport privatization including Australia (23 airports owned by its Federal Airport Corporation), Spain (49 percent of the company that operates its four main airports) and Russia (its 70 Aeroflot airports). The following is a summary of airport sale activity worldwide:

Completed Sales

Austria Vienna (28%)

Britain Heathrow, Gatwick, Stansted, 4 Scottish

Britain Liverpool (76%)

Belgium Brussels Terminal (52%)

Planned Sales

Argentina Two Buenos Aires airports

Britain East Midlands Airport

Denmark Copenhagen (25%)

Germany Bonn/Cologne (5%)

Malaysia All airports

New Zealand Auckland International

Northern Ireland Belfast

Potential Sales

Australia 23 airports of Federal Airports Corp.

China Minority stakes in several airports

France Minority stake in Aeroports de Paris

Germany Minority stake in Berlin airport firm

Ireland Air Riante (3 main airports)

Netherlands Minority stake in Schphol

Philippines Manila International

Russia 70 Aeroflot airports (40%)

Singapore Changi International Airport

Spain 49% of airport operations

Sweden Minority stake in Stockholm

Taiwan Main airports

Airport Lease/Develop/Operate (LDO )

An alternative to the outright sale of an airport is a long terra (30-50 years) franchise lease for its private development and operation. This type of arrangement has been used for decades in Europe to develop toll roads, and its use has now spread to developing countries for power plants and a variety of major infrastructure projects.

One of the first airport LDO projects was development of the new international terminal at Toronto’s Lester Pearson International Airport in 1991. The new terminal was developed by a joint venture of Lockheed Air Terminal and Huang & Danczkay, a Canadian developer. With a 40-year lease on a 130-acre site, the joint venture undertook a $650 million project, which included a 29-gate, 1.2 million SF terminal, a 3,300-car parking garage, a 500-room hotel and 5 miles of access roads with 6 overpasses. The terminal was designed with extensive retail space including an upscale department store. Original estimates predicted the project would take 7 years to complete, but it only took 3 years.

Based on the success of its first privatized airport project, the Canadian government awarded another LDO contract in 1992 for the development and expansion of two other terminals on the same basis.

The world’s largest LDO airport project is taking place in Greece. The national government has invited proposals for a $1.5 billion project to finance, develop and operate a new airport for Athens.

Most of the other proposed LDO projects are in developing countries.

* Turkey is negotiating for a $200 million, 18-gate terminal in Istanbul.

* Czechoslovakia has selected a consortium to develop and operate a $167 million terminal at Prague’s Ruzyne Airport.

* The former East Berlin airport (Schoenefeld) is seeking bids for a major renovation and upgrade on an LDO basis.

* Westinghouse Electric is doing a feasibility study in Russia on a proposed cargo airport in Irkutsk.

* Hughes Airport Systems is doing a feasibility study in Ukraine on modernizing its four main airports and air traffic control system.

* Vietnam has signed a 25-year franchise with a Hong Kong firm to expand and manage Hanoi’s Noi Bai Airport.

In this hemisphere, Mexico and Venezuela have announced plans to privatize all of their major airports via long-term lease franchises, and a study is underway for a $150-200 million new international airport to serve San Jose, Costa Rica. In the Caribbean, Jamaica has completed a study of an LDO terminal for its fast-growing Montego Bay airport. Trinidad is reviewing proposals for an LDO terminal and expects to award a contract this year.

The following is a summary of worldwide airport lease/develop/operate activity during 1993:

Facilities In Operation

Canada Toronto Terminal 3

England Birmingham Euro-Hub

Planned Projects (Selection Under Way)

Canada	Toronto Terminals 1 and 2
Czechoslovakia	New Prague Terminal
Greece	New Athens Airport
Hungary	New Budapest Terminal
Macao	New International Airport
Malaysia	New International Airport
Mexico	Lease of all Major Airports
Trinidad	New Terminal
Turkey	New Istanbul Terminal
Venezuela	Lease of all Airports
Vietnam	Lease of Hanoi Terminal

Potential Projects (Studies)

Costa Rica	New San Jose Airport
Ecuador	New Airport
Germany	Updating E. Berlin Schoenefeld Airport
Jamica	New Montego Bay Terminal
Pakistan	New Terminals at Islamabad and Lahore
Poland	New Warsaw Airport
Russia	New Irkutsk and St. Petersburg Airports
Spain	New Madrid Airport
Taiwan	New Taipei Terminal
Ukraine	Expanding Four Airports

U. S.Airport Privatization

The first municipality in the U. S. to seek to sell its airport was Albany, New York in 1989. The Federal Aviation Administration (F AA) denied Albany’s request, as well as a subsequent proposal for a long-term lease, citing previous grant agreements requiring all airport revenue to remain on the airport. The FAA, however, had previously approved a number of long-term leases with both public and private operators, all of whom are taking net profits off the airport.

FAA’s rejection of Albany’s lease request was, thus, inconsistent with its own previous practice. In addition, the U. S. Justice Department issued a legal opinion in 1991 concluding that Albany was entitled to recoup its original investment in its airport “in the event of its lease to a private firm.” Even though the legal opinion was requested by the FAA, they have not issued any subsequent policy guidance.

U. S. airports currently under long-term operating leases with either public or private firms are:

AIRPORT	OPERATOR
Atlantic City International	Johnson Controls World Services
Bader Field	Johnson Controls World Services
Kennedy International	Port Authority
LaGuardia	Port Authority
Morristown Airport	D. M. Airport Developers
Newark International	Port Authority
Rickenbacker Field	Lockheed Air Terminal
Teterboro Airport	Johnson Controls World Services

British Airports Authority (BAA)

While airport privatization is still relatively new, evidence from five years of BAA performance (plus two years of Toronto’s Terminal 3) supports the argument that it can make a significant difference in operating efficiencies and revenues. An analysis of BAA operations found major gains had been made in both revenue generated per worker and passengers handled per worker, but not by slashing the work force. In fact, the number of BAA employees increased by nearly 1,000 between 1987 and 1991. In addition, the level of capital spending at BAA airports doubled following privatization, with new terminals being developed at Heathrow, Gatwick and Stansted, on-site hotels added at all three airports, and plans underway for a high-speed rail line from Heathrow to Central London as a joint venture between BAA and British Rail.

The structure of landing charges is one of the significant differences at BAA’s airports. Rather than charging a flat rate per pound of aircraft gross weight as U .S. airports do, BAA charges rates based on the value of the service. Landing charges at Heathrow and Gatwick tend to discourage small private planes from using these very busy airports, thereby maximizing the number of passengers handled. In addition, landing charges are higher during the peak hours of each day and during the peak season (summer) of the year. Moreover, noisier aircraft pay a surcharge and quieter aircraft receive a discount to provide incentives for airlines to shift to quieter planes.

But perhaps the largest difference between public and privatized airports is the approach they take to concessions. Rather than viewing the sale of goods and services as an extra source of revenue, private owner/operators in both London and Toronto take an aggressively commercial approach. Airline passengers tend to be more affluent than the average citizen, and are virtual1.y a captive audience for at least one hour and often several idle hours. Both BAP, and the Toronto Terminal 3 consortium offer a vast array of goods and services at prices competitive with comparable name-brand outlets in the city. For example, both airports now include branches of the upscale London department store Harrod’s as one of their terminal concessions. As a result, net concession: revenues per passenger are three to six times higher than at most U.S. airports.

More robust revenues from commercial sources would avoid ) placing all the financial burden on the airlines, who are in fact the airport’s primary customer. The relationship between an airport owner/operator and the airline tenants is much like that between a shopping mall owner and its tenants. Each needs the other and they must operate as partners, not as adversaries. In 1983, BAA derived 46 percent of its revenue from commercial sources, with the majority coming from airline charges. By 1990, following privatization, commercial revenues had grown to 58 percent of a larger total, with airline charges down to 42 percent.

Los Angeles International Airport (LAX)

A recent study on ownership and management options for Los Angeles International Airport (LAX) used three different scenarios to determine the best way to maximize revenues and profits: continued ownership and operation by the city; sale/private ownership and operation; and continued public ownership with a 30-year lease to a private operator.

The study was reviewed by the Reason Foundation; an independent Los Angeles public policy research organization. The study compared the net present value of cash flows to the city under each of the three scenarios. Unless a federal law could be changed that permits private enterprise to operate airports for profit but prohibits governments from using airport profits/revenues for any purpose other than airport related expenditures, the cash flows for continued city ownership and operation would be zero.

Assuming the federal law could be changed, the net present value of revenues to the city under continued city ownership and operation would be $2.12 billion. By comparison, the net present value to the city of the sale/private ownership option would be slightly more at $2.20 billion.

The most dramatic finding in the study was in the cash flows to the city under private operation of LAX under a long-term lease. The 30-year lease option would produce a net present value to the city of $3.70 billion, significantly more than either city ownership and operation (75 percent higher) or sale/private ownership and operation (68 percent higher). It represents, in effect, the best of both worlds for both the city and the operator.

The city would receive a significant return on its investment in LAX without having to give up the degree of control required of outright sale. At the same time, the operator can maximize his revenues and profits without having to put forth the large capital outlay required of a purchase.

Federal Policy

Under the Airport & Airway Improvement Act of 1982 (and subsequent amendments), federal law prohibits a public airport operator from using any airport profits/revenues for anything other than airport purposes. Congress included this provision to ensure federal grants made to a public airport would be used only for that purpose, and not as general revenue sharing. The situation is quite different, however, for privately operated airports, which are clearly understood to be operated for profit. Although privately operated airports are not eligible for entitlement grants, they are eligible for certain discretionary grants, such as those for noise abatement.

The legal feasibility of shifting from a traditional non-profit, municipal airport operation to a for-profit, private sector operation was greatly enhanced by the President’s Executive Order on Infrastructure Privatization, as previously noted.

To clarify the lack of coherent federal policy on privatization of airports and other state and municipal enterprises receiving federal grants, the Order directs the FAA (among others) to approve requests to sell or lease such enterprises.

Georgia Legislation

During the 1992 session of the Georgia General Assembly, legislation (HE 1429) was introduced to amend the powers of the State Tollway Authority and authorize it to enter into private development agreements for the design, construction and operation of tollroads throughout the State. This landmark legislation was intended to take advantage of the generous financing provisions of the Federal ISTEA of 1991, by leveraging Georgia’s annual federal highway funds through the utilization of private investment capital.

HB 1429 envisioned a development process similar to the LDO programs described previously. The legislation was patterned after the AB 680 toll road program implemented in California, except it prohibited outright private ownership of highways. The process would have included the following steps:

Publication of Program Rules and Regulations
Pre-qualification of Development Teams
Presentation of Concept Proposals
Competitive Selection and Award of Exclusive Franchise
Development of Detailed Program
Submission of Plan and Negotiation of Terms
Award of Development and Operation Contract

HB 1429 passed the House of Representatives by an overwhelming margin, but stalled in the Senate when it became closely identified with construction of the Georgia Department of Transportation’s proposed Outer Perimeter Highway. During the 1993 Legislative Session, a Senate companion bill: to HB 1429, SB 328, was amended in the State Senate to broaden its scope and powers, while retaining its original basic intent. SB 328 sought to change the name of the State Tollway Authority to the “Georgia Transportation Authority,” and include rail passenger facilities among the projects authorized for private development and operation. SB 328 passed the Senate, but was then tabled in the House because of continued opposition to the Outer Perimeter Highway.

Hartsfield Privatization

Current projections estimate more than 44 million passengers (domestic and international) will travel through Hartsfield in 1994, which is 76 percent greater than those projected for LAX. Based on the Reason Foundation’s forecast for LA:X using the two privatization options, the same two options would bring substantially greater revenues to Atlanta from Hartsfield. Those revenues would be in the neighborhood of $5 billion over a 30-year period, an average of $166 million per year.

Given the Atlanta’s desperate need for cash to shore up its deteriorating infrastructure, the option of private ownership and/or operation of Hartsfield should no longer be ignored. The feasibility of privatization options for Hartsfield can be assessed by inviting proposals from qualified development teams. This effort would avoid the costly and time consuming process of conducting a “feasibility” study, since the same issues would have to be addressed by the development teams in preparing their proposals. Significantly increased revenue to Atlanta and non-political, professional airport management are in the long-term interest of the airlines, airport vendors, Hartsfield passengers and Atlanta taxpayers.

REFERENCES

1. Robert W. Pool, Jr. and Bryan E. Snyder, “Privatizing Los Angeles International Airport: Analyzing the Alternatives,” Reason Foundation, Apri11993.

2. Price Waterhouse, “A Lawmaker’s Guide to Creating Partnerships in Transportation Infrastructure,” 1993.

3. Former President George Bush, “Executive Order 12803 of April 30, 1992, Infrastructure Privatization,” Federal Register, Vol. 57, No. ’36, May 4,1992.

4. “FAA Airport Improvement Program Handbook, ” Order 5100.38A, Washington. D.C., Federal Aviation Administration, 1989.

5. William G. Reinhardt, “Transportation Special Report,” Public Works Financing, March 1993.

6. Deloitte & Touche, “City of Atlanta, Georgia, Department of Aviation Financial Statements for Years Ending 1991 and 1990.”

Lowell Evjen is President of Southern Technology Ventures, Inc. and a member of the Board of Governors of the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.