Another Reason for Airport Privatization

Government Ownership of U.S. Airports Thwarts Airline Competition

Robert Poole, Jr., is president of the Reason Foundation and a long-time transportation policy researcher. Copyright 2000 Reason Foundation.

In several ways, the specter of re-regulation of the airlines raised its head in 1999. A number of bills in Congress aimed at increasing smaller airlines’ access into major hub airports like Chicago’s O’Hare by giving such airlines (or service from smaller cities) legal preference over other new service. And several other bills would have created a “passenger’s bill of rights” imposing new federal controls on the terms and conditions of airline service.

Fortunately, none of these measures was enacted, leaving intact the enormous consumer benefits of the Airline Deregulation Act of 1978. Thanks to the hands-off policy created by that measure, air travelers save some $19 billion per year over what they would have paid had federal control of routes and fares remained in effect. While the measures considered by Congress would not have brought back total government control, they would have put us on a slippery slope toward government—rather than market—decision-making about who can fly when, where, and at what price.

That said, however, it is clear to most frequent flyers that today’s airline service leaves much to be desired. Record-high levels of delay, overcrowded planes, less meal service, new restrictions on carry-on baggage . . . flying in many ways is not what it used to be. But if government regulation is a cure worse than the disease, what hope is there for beleaguered air travelers?

The answer is supposed to be competition. If you don’t like the quality and price of Airline A, take your business to Airline B instead. Surely some profit-seeking entrepreneurs will attempt to offer a better combination of price and performance to appeal to those frustrated by today’s typical airline service. And indeed, there are some such alternatives. For millions of people, the low-fare, no-frills, but highly reliable service of Southwest is a viable alternative. For others, Midwest Express offers a much more luxurious form of service, albeit at a somewhat higher fare. But for millions of other air travelers, innovative airline service offerings are very hard to find. This is especially true at many cities with a single large airport where the vast majority of service is provided by a single airline’s major hub—for example, Atlanta (Delta), Minneapolis (Northwest), and Pittsburgh (U.S. Air).

Why haven’t airline entrepreneurs broken into such markets, offering clearly different alternatives for air travelers? It turns out that many have tried, but have had great difficulty obtaining gates at such airports. And that leads us to one of the key respects in which airline deregulation is an “unfinished revolution.” While airline service itself has been freed of economic regulation and allowed to become a dynamic industry, U.S. airports are still run in the old-fashioned, static, bureaucratic manner typical of the pre-deregulation era. Among other things, this means that their management style is more passive and risk-averse than that of the world’s growing body of privatized airports, now numbering more than 100 (and including the main airports in such cities as Auckland, Buenos Aires, Dusseldorf, Johannesburg, London, Melbourne, and Rome).

Privatized airports (and also leading “corporatized” airports such as Amsterdam and Frankfurt) are run as businesses, intended to make a profit by aggressively developing various profit centers, tailoring their services to many different groups (including airlines, originating passengers, transfer passengers, meeters and greeters, and employees). Recent research at Oxford University has shown that the management approach of privatized airports is—not surprisingly—significantly more passenger-friendly than that of traditionally managed airports.

Willing to Take Risks

Privatized airport managements are also more willing to take on the risk of new investments—such as the creation of new terminal space to provide gates for new-entrant airlines. And this brings us back to the question of increased competition by such airlines, especially in “fortress hub” cities where air travelers today have very limited options. Under typical U.S. airport management practice, the major incumbent airlines have signed long-term gate-lease agreements (making them “signatory” airlines). From the standpoint of risk-averse airport management, these long-term agreements give them a more-or-less guaranteed revenue stream to pay off the bonds they issue to build the terminal facilities. But in exchange for this security, they give up substantial control to the signatory airlines. Usually, the long-term agreements give these airlines what amounts to a veto power over any terminal expansions. That means when new-entrant airlines want to start service at such an airport, there are often no gates available at all—or there is only “remnant” space available at odd hours at gates leased by the signatory airlines, which they might make available to the newcomer, at two to three times as much as what the incumbent is paying under its lease!

These barriers to entry are well known within aviation circles. In October 1999, the U.S. Department of Transportation (DOT) released an important report, “Airport Business Practices and Their Impact on Airline Competition,” explaining how all this works and concluding that, indeed, “Airport business practices play a critical role in shaping airline competition. Access at many of the nation’s airports is limited . . . because of long-established airport business practices.”

What the report did not do was to contrast these business practices with those of corporatized and privatized airports around the world. Had DOT’s researchers done so, they would have found that an airport run as a for-profit business does not cede de facto control over its facilities to its largest customers. At most such airports the gates remain under the control of the airport company and are allocated hour by hour to individual airlines, as needed. (That is why at many European airports, and at the privately run Terminal 3 in Toronto, the airline signage at each gate is electronic, permitting it to be changed in moments from one airline’s name to another.) And that is how gates will be managed at the new International Arrivals Terminal at JFK in New York—a $1 billion project being developed and operated by a private consortium including the for-profit company that owns and operates Amsterdam’s Schiphol Airport. The IAT consortium is taking the entire risk of keeping the gates occupied because it wants the management flexibility to get the most value out of each and every gate.

In short, the answer to today’s serious limitations on new airline entry at U.S. airports is outright privatization, in which existing airport owners (cities, counties, and states) sell or long-term lease these facilities to professional airport firms.

Real airline competition is being impeded by the outmoded management approach of U.S. airports. Much of the world is moving to a new paradigm—the airport as a for-profit enterprise—that is far more consistent with a dynamic, competitive airline market. It is high time the United States did likewise.