The Pros And Cons Of Airport Privatization Economics Essay

I. Executive Summary

Airports have evolved mainly as government-run enterprises. Now, many airports seek privatization in part to improve their abilities to compete in the new global economy. The manner of ownership covers a wide spectrum: government-owned and controlled airports, government-owned corporations, independent airport authorities, public-private partnerships with government majority ownership or with private majority ownership. Reasons to privatize an airport include an improved ability for an airport to diversify its operations to enhance profitability, to fund expansion, and to improve competitiveness. The arguments for privatization include that the falling availability of public funds, and a need to change to the market-oriented outlook that private businesses develop. Objections to airport privatization are related to the apprehension that a private operator will take advantage of the monopoly that airports represent in air travel. Not all airports are suitable for privatization. Some in the developed world, such as in the USA, are controlled by local governments and affected by airline requirements. The less developed countries and their airport authorities lack sufficient funds to develop their airports; although these countries need these airports, privatization is impractical, and alternate business plans must be developed. Unlike other countries, Canada, Australia, and New Zealand have taken the path of mixed public-private control to maintain power over matters that affect the public good. Privatization enables a long term focus to meet the demands of international competition, to maintain a customer-focused plan, and to free the government from providing subsidies to an unprofitable enterprise. The potential for Canada to completely privatize the National Airport System Airports is small due to the serving of the public good under the current system.

II Introduction

Airport privatization has become a trend in the past thirty years as economies change and the air transport sector matures. Airport management and ownership, once mainly the domain of governments, has evolved into a mix of public and private airport ownership. Airports must now compete with other airports around the world for business, and government may not be the best owner for a globally-competitive enterprise. Airports must have the freedom to compete on the commercial level, and not just provide a service to the travelling public. Airports seek privatization in part to improve their abilities to develop a customer-focused business plan. This paper will present a review of the history of privatization and predictions for the future of this trend, and a comparison of the means, effects, and relative success of government/ public vs. private control.

What is airport privatization?

Simply put it is the transfer of ownership or management or both to the private sector (Graham 2008, 15). The manner of ownership covers a wide spectrum: “airports owned and operated by government departments, 100% government-owned corporations, independent airport authorities, mixed enterprises with government majority ownership and mixed enterprises with private majority ownership” (Tae et al 2006, abstract).

Analysis of the need to privatize

Airports have evolved mainly as government-run enterprises. They serve the public good, and were thus taken on as any other part of public infrastructure would be. Bridges, roads, ports, and other transportation-related projects have traditionally been part of the public good. However, many of these facilities are being privatized. Roads and bridges are now conceived of as wholly privately developed and owned, or as public-private partnerships.

Privatization can provide several benefits. It can remove the burden from the government’s finances, spread the risk associated with operations, and introduce ways to improve efficiency and competition. Often better airport management can be put in place. For example, if the airport is run under a government department, facility commercialization would be difficult. Private management can reorganize the accounting so that the airport’s costs and revenues can be monitored and adjusted, costs can be cut, and revenues boosted.

The arguments for privatization are many. Less public investment is needed; on the one hand, public funds are less available than they once were, and on the other hand, private corporations have a market-oriented outlook for their business plans. Improved access to commercial financial markets, improved ability for an airport to diversify, and improved operational efficiency may be the result. Employees and management are motivated to perform better. Lastly, a deregulated airline industry led to growth which the existing model of airport management and ownership could not handle.

Privatization may be a better option if market forces can enable competition rather than a monopoly, meaning less government regulation is necessary. This preserves the public good and makes the enterprise more likely to be profitable. Conversely, if the potential exists for a monopoly in a market, then the involvement of the government in ownership is necessary, and so is more government regulation. Table 1: “Government Control of Essential Elements of operations in three countries”, shows how Canada, Britain, and Australia deal with these concerns by maintaining control in key areas of the public good of aeronautical standards, access, and pricing.

III. Privatization Strategies

Privatization does not mean handing over of complete ownership to a corporation. The most practical scenario would be for a government to retain control over the type of facilities to be developed and other changes, while the operator, the commercial enterprise, oversees “day-to-day and year-to-year operations” of the airport (de Neufville 1999, 6). The net benefit to the public interest would seem to be the lack of necessity to raise funds to expand or run the facility, or to service debt.

Types of Privatization

transfer of operations to private sector (Graham 2008, 25).

transfer of ownership to private sector (Graham 2008, 25).

share issues, IPOs: airport needs to make a profit; shareholders assume the risks

trade sale – sale of facilities

concession – control passes to private operator for a fixed period – this is how some new roads and bridges are managed in North America – annual fee paid to government, which retains ownership (Graham 2008, 32).

a private operator finances and builds new facilities, pays annual fee to government, thingies ownership to the government after a fixed period

management contract – an operator runs the facility, and either the operator gets a fee or the government receives a percentage of revenue (Graham 2008, 34).

The better way to privatize is to share control between government and private interests. See Table 2: Degree of control mix among different styles of government and full private ownership (from de Neufville 1999, 17) for an illustration of how this is so.

Determining the potential of an airport for privatization

Not all airports are suitable for privatization, and the experience differs in the developed and less developed worlds. In the developed world, the USA is an anomaly. Less privatization has happened there, and this may be because most airports are under local control, and also under significant pressure from the airlines that use them (de Neufville 1999, 5). Both entities can interfere with any contemplated changes. The approach used in Canada, New Zealand, and Australia, has been to turn the airports into not-for-profit corporations. Such airport authorities as Vancouver Airport Services, a not-for-profit corporation, operate their own and other airports.

The case in the less developed world for airport privatization differs due to the lack of both public and private funds for infrastructure development. Still, these countries need these airports, and alternate business plans must be developed. Less developed countries have much more growth potential in air transport and that can be met with improved facilities and increased capacity (Button 2006, 14). The major part of their revenue is airside (Button 2006, 14). Figure 1: “A generalization of airport trends in developing and developed countries” will illustrate this phenomenon. Button (2006, 14) adds that airports in less developed countries do not generate sufficient revenue to cover costs, so the governments must provide subsidies, and this makes these airports unsuitable for privatization. A full privatization cannot be expected until a national economy can support infrastructure improvements and an airport can prove its potential for profitability.

IV. Operating environment considerations regarding privatization

The operating environment needs some favourable market conditions for success in privatization. External market forces can encourage or prevent successful conversion to private control or ownership; Button asserts that “[r]egulatory changes in airport policy in countries such as the UK came against a backdrop of successful liberalization of many other markets, quite strong macroeconomic growth, and with fairly well defined objectives” (2006, 3). A privatization could not proceed in the absence of these factors, as in the case of a less developed country. There, the private sector has limited access to capital markets and the government may not be able to afford to borrow internationally. The catch is that these economies lack sufficient development for an investment to have acceptable risk levels; without the airport and other transportation infrastructure, though, the country cannot develop.

The common operating factors are:

Competition exists for investor dollars with other forms of real estate – malls, offices, developable land. The author of “US Airport Privatization” speculated in 1993 that the market for airports was not a speculative one. Now, market opportunities are being found in airport privatizations.

Developers may not want to work with the government bodies, which regulate airports and airlines, or to be tied to a long-term investment. Developers would look for opportunities that facilitate adaptability to changing market conditions. Only a long-term strategy would work in this investment.

The labour contracts in force when the ownership switches over from public to private would likely have to continue, hindering potential private operators.

Property taxes would have to reflect enhanced market value of an airport property. Most of an airport’s real estate is empty land, and therefore not directly capable of providing a profit to an operator.

Any airport has relations with the surrounding communities, but a private operator would be unable to negotiate in an area of government responsibility.

In addition, other challenges, which may have hampered airport profitably before privatization, remain. These include security, air traffic growth, airline strategies, airport competition, and international incidents such as SARS or terrorism.

Political interference is always a possibility in the area of airport regulations, industry deregulation, and the changing nature of the airline industry.

A conflict exists between the desires of a private operator to have looser regulations and the need for government oversight of the industry.

Objections to airport privatization are related to the monopoly that airports represent in air travel (Graham 2008, 16). The fear is that the private operator will make a profit that could have gone to the government. These fears are addressed by the nature of private enterprise, which seeks to run a business profitably.

Potential Economic Benefits of Airport Privatization

Originally airports were considered to be part of a nation’s essential infrastructure, and less attention was paid to profit than to operations (Frost & Sullivan). The three means of economic gains to be found in privatization are: improvements in operating efficiency: the private for-profit business model more often leads to a further exploration for means to cut costs and boost revenues than does public management; the introduction of new management styles and marketing skills directed to serve users with a more consumer-oriented approach; and the ability to make better investment decisions.

The trend in many countries is now to contemplating the potential for profit from an airport. The example of the Vienna airport will serve to illustrate how privatization in a developed country can benefit an airport’s operations. Before 1978, the airport was a public utility and had to seek subsidies to cover losses. In 1978, the airport management was reorganized so it would work like a commercial enterprise, but with public sector shareholder ownership. A further reorganization took place in 1992 to address industry and customer needs separately from the service divisions. Measures such as strategic planning and cost control were introduced to improve the airport’s competitive advantage (Graham 2008, 17). A share issue was made in 1992 for expansion and improved commercial operations, signaling a transition to private sector control.

Privatization enables a long term focus to meet the demands of international competition, to maintain a customer-focused plan, and to free the government from providing subsidies to an unprofitable enterprise. Many privatizations have taken place because the potential for airside growth is limited. In other words, the developed countries have reached saturation on airside growth, so they seek growth from commercial services. This means shopping, restaurants, hotels, joint ventures are added to the airport to add value and capture more dollars. In addition, Button asserts that the success of privatized airports has encouraged governments to change the management and operations of their airports to mirror what the privately-run operations are doing (2006, 3). Then, the facility is seen as a single monopoly, but as separate revenue-generating businesses. Privatization seems to enable a better response to market forces by developing commercial potential.

VI. Potential for Further Airport Privatization in Canada

Canada has followed the route of maintaining almost all operational facets under shared control, with no airports being fully privatized. See Table 3: Status of Privatization of Airports in Australia, Britain and Canada before (B) and after Privatization (P) for a comparison of how control was changed after a degree of privatization. Australia and Britain have given control of finance and operations to the private operators, while Canada has retained it. To address local community and economy concerns, maintaining a partnership may be the better route to follow, and experience will show which method is better. Despite what the author of “US Airport Privatization” found, privatization in the airport industry is attractive to investors. However, Frost & Sullivan report that by 2006, only two per cent of the world’s commercial airports had been privatized, either through management or ownership.

Canadian airports are classified as one of two types: Non NAS airports, meaning National Airport System airports, with fewer than 200,000 passengers per year and which are locally and provincially owned and operated; NAS airports, with more than 200,000 passengers per year, are owned by the federal government but managed by boards of non-elected representatives. See Table 4 – “NAS Airports- Canada’s National Airport System”, for a list of these NAS airports. They operate as not-for-profit entities under long term leases with the federal government that are reflective of fair value, including the future earning potential (Canadian Airports Council 2008).

Transport Canada, as the owner of the airports, has several aims in setting NAS airport rents. First they relate to infrastructure stability, and ensure the air transport sector remains financially healthy, meaning both the airport infrastructure and the airlines. The second aim relates to market conditions: to ensure an air transport sector that is competitive with both other forms of transport and with international air transport systems, and responsive to changing market conditions. The third serves the public good: the obtaining of a fair value for the government (National Airports Rent Policy Review 2010). The NAP, the National Airport Plan, appears to indicate that the federal government has no plans for complete privatization. Rents charged by the federal government to the local airport authorities are calculated with respect to long-term cash flow forecasts and capital expansion needs, and to valuations of international commercialized airports, particularly in the USA, Australia, New Zealand, and Britain. Therefore, the NAS airports serve the Canadian public good by providing a benefit to the Canadian public while remaining competitive.

VII. Conclusion

The encouraging factors include: continuing growth in air travel requires improvements in infrastructure that most governments cannot afford; improvements in economies of scale through expansion of facilities and concentration of services; still more commercial opportunities to be found for exploitation; investors with longevity have the better chance for continued profitability than would newer entrants. Privatization seems suitable for airports in more developed countries, because while more developed countries used to rely on government financing, the private sector has more to invest in major infrastructure projects than the government does. Allowing a private sector corporation to make profits could encourage the expansion of facilities sooner than a government-owned airport would do this.

The fears that privatizing airports could be unsuccessful for the buyers and operators because of the untested variables, such as real estate values and external forces acting on an enterprise, seem to have calmed down with the growing body of experience in these operations. While ownership of facilities might be transferred to the private sector, government regulations still affect the business. A private operator cannot exercise eminent domain; it has to follow laws, while seeking to maximize his gain. Therefore an airport will never operate as an entity that is entirely separate from government. Now the focus is on the next step. The potential for future privatizations depends on the county’s economic development and on its growth potential. In the long run, both central and local authorities may have to pursue the course of even greater diversification and commercialization of airport ownership structures.

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