D. Dowd Muska

 

How to Bungle Airport Privatization

January 01, 2015

Branson isn’t for everyone. Those seeking unique and edgy entertainment don’t dig the Lennon Sisters. Or Tony Orlando. Or Yakov Smirnoff.

But for privatization wonks, the capital of cheesy entertainment, nestled in the Ozarks on the Missouri-Arkansas line, is beyond cool. It has, as the Government Accountability Office (GAO) noted in a recent report, the only “commercial service airport in the United States … privately developed and … privately operated.”

That’s correct -- in “hypercapitalist” America, the GAO documented, “Nearly all of the 3,330 commercial service or general aviation airports designated as part of the national airport system are under city, state, county or public-authority ownership.”

More than a little curious, given the air-travel industry’s massive size. The major carriers’ revenue reached $150 billion in 2013. Annual traffic at the nation’s busiest hub, Atlanta’s Hartsfield-Jackson, exceeds 90 million. (Ten airports top 30 million in passenger volume.) The five most active cargo airports handle more than 12 million tonnes of goods per year.

Shipping people and stuff through the skies is big business. On the ground, though, demand curves, pay-for-performance, and P/E ratios are absent. During the Clinton administration, the president and a GOP-controlled Congress took a surprising step to transition a handful of airports to economic reality. They established the Airport Privatization Pilot Program (APPP), which offered guidance and rewards for five government entities to reduce or eliminate their roles in aviation. Big participants were encouraged to relinquish control to private mangers, while small fry could either lease or sell themselves to profit-seekers.

Nearly two decades later, the GAO dispatched its auditors to examine the program’s results. Here’s the money stat: 0.3 percent. That’s the share of eligible airports that submitted APPP applications to the FAA. Ten, in all, but just three -- Chicago Midway International Airport, Puerto Rico’s Luis Munoz Marin International Airport, and Louis Armstrong New Orleans International Airport -- had annual boardings in the millions.

It gets worse. Successes were even skimpier. Stewart International Airport, in New York’s Orange County, was leased for a time, but reverted to full government control in 2007. Puerto Rico’s effort alone jumped all the hurdles, and engineered a transfer to private management.

What went wrong? The GAO dutifully chronicled the APPP’s failings. Coveted tax perks were a major villain. An expert consulted by the office “stated that one obstacle … is the private-sector airport operator’s lack of access to tax-exempt bond financing increasing the borrowing costs when compared to public-sector airport owners.” Avoiding local levies provides another advantage for government. In Chicago’s failed attempt at outsourcing, “officials had to negotiate with state lawmakers to maintain Midway’s property tax-exempt status.”

Another daunting barrier was the application process. It was cumbersome and pricey. The FAA’s red tape was vexing. Airlines had to be asked for permission to privatize. “Community” groups erected opposition. Unions weren’t happy. Political winds shifted. Economic conditions changed. Months gave way to years. Every day that passed brought another expense.

For the specifics, read the full report. But you’ll probably be left a bit unsatisfied. The GAO barely addressed something fundamental to privatization resistance: The men and women who run government aren’t interested in downsizing. Quite the opposite is true -- mission creep is their goal.

Airports are “quasi-public” creatures. Policies are set by elected officials and bureaucrats. But operating income is derived from fees assessed to carriers and concessions granted to firms that operate parking lots, restaurants, and gift shops. Capital expenditures are covered by bonding, federal subsidies, and passenger charges. An airport enables a region’s political class to play with an important piece of infrastructure, boast about its architectural characteristics and role in local “economic development,” and dodge the risk of a taxpayer revolt. Pols get to serve on oversight boards. Career bureaucrats often nab lucrative, lifetime gigs. Consultants, lawyers, and economists get plenty of work. And media scrutiny is reliably light.

The GAO concluded that “for an airport privatization to occur, the private operator must be able to make a profit and the public-sector airport owner must believe that more will be gained than lost in the transaction.” Power, prestige, substandard transparency, slim accountability, and jobs for the politically connected -- airports’ decisionmakers have plenty to lose, and very little to gain, from deferring to private management or surrendering to private ownership.

Federal incentivization through the APPP has wholly failed to get state and local governments to abandon their aero-fiefdoms. It will take a bottom-up approach, driven by discriminating flyers and informed taxpayers, to vanquish airport socialism.

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.

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