Airports should be Privatized

Introduction

In a realistic view, privatization involves the transfer of control or ownership from the public and government to the private sector. Airports recently are exceedingly viewed as enterprises rather than public services. The government can improve airport operations with the help of the private sector. The subject of privatizing airlines is a hotly debated one. Privatization of airlines is a whole new idea and a difficult task at both political and conceptual levels. There are vast implications on privatizing the airlines; the question that will be on many people’s minds is if the airlines become private enterprises, will they operate efficiently? And whether there will be development of efficient and working capital markets. In this research paper, I will look at how the airlines can be privatized, various techniques that can be looked into, and various benefits, if any, that will accrue from the privatization of the airlines.

Some big cities, such as New York and Los Angeles, have considered the option of privatizing the airports. Opponents say that the government will favor privatization so as to divert revenue from the airport that would otherwise be used for developing the aviation industry or for other municipal purposes. In doing so, the costs for airlines and passengers will be increased. On the other hand, proponents claim that privatization would bring in much needed capital into the aviation industry, since airports will be more commercially oriented and financially sufficient.

Research Questions

• What are the techniques that can be used in the airport privatization process?
• What other countries have experimented with the privatization of airports?
• What are the benefits of privatizing the airports?
• Where does the airport obtain its funds?
• What factors motivate privatization?
• What are the challenges accrued from privatization?
• What are the effects of the privatization of airports?

Research objectives

1. To evaluate other countries that experimented with the privatization of airports.

2. To establish the benefits of the privatization of airports.

3. To describe the techniques that can be used in the privatization of airports.

4. To evaluate the challenges that impedes the privatization of airports.

5. To describe the effects of privatization on various sectors and persons.

6. To establish where an airport obtains its funds.

7. To find out what motivates privatization.

Methodology

In this research paper, I will use empirical evidence to support the research questions and objectives. Journals, newspaper articles, books and websites written by different authors from different parts of the world on the privatization of airports will be used to analyze the objectives.

Literature review

In his article, Guidelines for airport privatization, Robert Poole (1994) stated that capital investments projects can be used in all types of privatizations, but in order for those airports to have access to grants, the government must be involved. Tax exempt bonds, however, are benefited by the privately owned airports and the can be used for development purposes. Evan Sparks’ (2008) work focuses on the various countries that have experimented with the privatization of airports and their outcomes. The study includes countries such as UK, China, Canada, Australia and New Zealand. The results of the countries that have tried privatization affirm that proper incentives, competition and choice are the most essential components that will make aviation infrastructure safe and efficient. Work of Richard de Neufville takes a different approach by focusing mainly on why there should be no full privatization, taking into consideration that commercial airports have public interest and they have a say on the services given and also that the government has regulatory controls.

Discussion

The simplest form of privatization of the existing airlines is merely outsourcing management, mostly on a relatively short-term basis. There might be enormous economic benefits if the governments allowed a long-term lease of the airports or better sold them off to willing buyers. The private sector can be granted a long-term or perpetual franchises to finance, own, redesign and operate the facilities. The technique can work well by converting military bases to commercial airports. On the other hand, airports in the United States belong to the public; it is evident that the private sector plays a major role in their operation as well as in their financing. Study shows that employees of private companies account for almost 90% of all employees in the country’s largest airports. Furthermore, the major source of finance of this industry for airport development is the bond debt that is sometimes secured by revenue that comes from the airports.

There are several factors, such as providing additional private capital, that are required for development and that are a great motivator for privatization. However, various challenges impeded this action; legal and economic constraints are the major hindrances to selling or leasing these commercial airports. Most traffic control systems are owned by the federal government, but unlike other traffic control systems, commercial airports are owned mostly by local governments, in special cases, states. They are also subject to federal regulatory control, as a result, federal laws determine substantially whether the public owners could choose to sell or lease their airlines and also if a private investor can be able to be a buyer.

Techniques/ strategies that can be used in the privatization of airports

Full privatization of airports is almost impossible, because the public will be always involved in the aviation industry, and want to have a say in the size and level, prices and accessibility of services offered.. The government will always control some of the airports’ operations, either through a shared partnership or through regulation. From data of countries worldwide that have adopted privatization, government will always have some control in the sector through regulation. This is because the airports cannot set their own performance standards and marketplace prices and neither can they restrict access to their products. Hence, the question that the US should be focused on is how the shared partnerships should be organized.

Major sources of funds for airlines

The airlines have various sources of obtaining capital for their development. These include: federal grants, bonds, charges for passenger facility and airport revenue. The federal grant is available from the airport and the airway trust fund so as to help support development projects that will improve the airline’s capacity and security. The grants are allocated according to a given standard apportionment formula. Bonds, as a source of financing, are given on a long-term basis and most airport bonds are secured by airport revenue. The airlines also generate revenue internally from pacts such as landing fees, parking fees and concessions. The revenue that is left after paying for operating costs is then used for development.

Shared partnerships

This technique for airport privatization is the most preferable; in this case, control of airports is split among the government and the private sector. Several types of contracts arise from the shared contracts; the main factor that differentiates different types of contracts available is the amount that private investors contribute. The more they contribute, the longer their contract is. The above enables the private investors to retrieve their investments and make profit.

The various shared partnerships between the government and the private sector include:

• Subcontracting services: this is mostly used for short terms, such as subcontracting for various kinds of services in the airports.
• Master concessions: this is typical for operating existing facilities and is for medium terms, such as 10 years. For example, organization of shopping areas by private investors.
• Build and operate contracts: the private investors typically build projects that are under long-term contracts, mostly 25 years. The facilities are, for example, passenger buildings that could be dedicated to specific type of airlines.

Potential difficulties arise from shared privatization and, therefore, there is need to do well-calculated activities. Both the public and private investors need to protect themselves from contingencies that may arise. Shared partnerships may face a few challenges as dealing with another party with conflicting interests is a hard task. The partnership approach is preferable for it assures the public curiosity  the local community and in decent operations, as well, in the urge for sufficient airport capacity for its purposes.

Countries that have adopted airport privatization

Some countries were bold enough to try out airport transportation. These countries include Australia, Canada, China and the United Kingdom.

Australia

In Australia airports are privately owned. In order to increase efficiency, air operators are under pressure and this incites them to make excessive investments. In the country, price caps were set in the privatization process. This caused a lot of losses to the airlines and eventually the price caps were replaced with monitoring, whereby, prices were monitored not to reach uncompetitive levels.

Canada

In Canada, most airports are owned by nonprofit corporations, which are designed to elevate airport investments. Their objective to invest has been gravely achieved, but nonprofit model has led to hiking of airline fees but not above the uncompetitive levels.

China

In China, an incremental approach has been used in airport privatization. Six of its major airports have been publicly listed so as to improve efficiency. It was discovered that the listed airports performed better as opposed to their unlisted counterparts, but it was also discovered that they had not matched up to their expectations. Experts have attributed to the shortcomings the control by the local government, since it has a partial privatization in that the government has a great influence on the operations, as well as the investment decisions.

United Kingdom

Unlike other countries, its privatization venture in the infrastructure of aviation was a total disaster. Three of the largest airports in the UK are owned by BAA and studies show that this has had anticompetitive effects and there has been a recommendation for BAA to sell some of the airports to other London investors. 

Benefits of adopting airport privatization

In shared partnership, any type of partial privatization can have a good value for both private and public investors. If all goes well, the public gets the advantage of skilled designers, who have intense experience and who are motivated by the mere reward of financial gain. The private investors can get superior infrastructures within a short time, since they are not restricted and they do not encounter delays in bidding as the public does. Additionally, the private investors get the facilities they want, as well as a great amount of returns on their investments. Both parties benefit from privatization.

The benefits of a more entrepreneurial approach towards airport control and management include: the following increased efficiency, improved airport amenities, increased airport revenues, possibility of new revenue channels of the state and local governments, and finally, reduced risk of coming up with uneconomic projects (Sparks, Evan, 2012). Airports, taxpayers, passengers and private plane owners can benefit from the privatization of airports approach in every sense of the word. Although there are opponents who are trying to bring down this approach, it has more good than bad sides and it should be implemented immediately.

Proponents say that with federal government in charge of government security terrorism will be highly combated as the federal government security guards are well-equipped and trained. At first glance, screening by federal government security men seems appealing, but after the September 11^th event, more has to be done to restore the public confidence. There are many reasons why we should not adopt a system that is headed by the federal government.

Firstly, there is an urgent need to have security that safeguards the entire airport. Federalizing this system will do nothing about controlling access to the rest of the airport for cleaners and other individuals who do not have secure IDs. Secondly, American airports need a system that is flexible; when people’s lives depend on security, like in airports, it is important to have the ability to discipline any staff member who does not comply with the rules or is untrustworthy. This is where privatization comes in; it will bring about new technology that will take care of bag inspection. Flexibility will be required to reassign the duties of people whose jobs are taken over by technology. In a federal bureaucracy, that is almost impossible.

Thirdly, it is important to note that commercial airports vary in size and structures. Some have a central terminal, others have unit terminals; some have hotels, others immense international services, while others are exclusively domestic. The federal government gives a “one size fits all” solution that may not go well with the different designs the airports have (Poole, Robert, 1994).   This is why we need privatization of the airports; it is the best solution that is available for the airports to function efficiently.

With the government being involved into the aviation industry, the airline services leave a lot to be desired. Delays of the airplanes, overcrowded planes and restrictions on carry-on baggage spring up every day. The government in controlling the management of the airports becomes more of a disease than a cure. The answer to all these troubles is competition, which includes privatization of these airports, and investors in order to keep their customers and get returns from their investments have to provide better services as compared to their competitors.

Apart from competition, private investors are willing to take up new risks, such as creation of new terminal space to provide way for new airlines. In a typical government scenario, major incumbent airlines sign long-term lease agreements; this gives them a more or less guaranteed stream of revenue to pay off their bonds that they have issued so as to build terminal facilities. These long-term leases give them a veto power, so when new airlines want to start operating at the airport there is no way through for them (Richard de Neufville, 1999). If airports are privatized, airport gates do not lose control at all, but rather they control the hours a new entrant is supposed to offer its services.

Airport privatization brings with it a lot of profits for its shareholders; this is because of the steady growth in passenger traffic as quality services are being offered. Revenue from concessions is another source of large profits. Proponents of privatization believe that the private sector will provide additional capital for development; this means that facilities and infrastructures in airports are bound to be upgraded to fit for competition. Secondly, privatized airports are more profitable because the private sector operates them in an efficient way, and finally, privatization would benefit the government financially by reducing demand for public funds, as well as increasing the tax base.

Impediments of airport privatization

 Recently, there is an increased desire to privatize airports. But various legal constraints slow down the process. The basic obstacle is the legal assurances the airports agree to meet in order to obtain federal grants. Assurance that is the most problematic is the one regarding the use of airport revenue. The current law states that revenue that sprouts from airports are supposed to be used for airport operations and capital costs. It cannot be used for non airport purposes. Even if the airport privatization process surpasses the legal obstacles, there is the issue of grants, privately owned airlines will not be eligible to obtain grants and tax exempt debt financing. With these obstacles, another way has to be used to replace passenger facility charges and this may lead to increase in some of the fees, which may not be a good step in making profits whatsoever.

Effects of privatization on various sectors and persons

Airport privatization has a few effects on local and state governments, federal interests, airlines and passengers. Some general observations and current trends will be used to illustrate likely effects on the abovementioned sectors.

Local and state governments

Public airport owners are unlikely to sell off or lease the airports unless they have a form of financial gain from the process. Privatization will increase the market value of airports and this will increase the financial benefit the local and state governments will have in the long-term period.

Airlines

Effects on the airlines largely depend on whether the privatized airlines will still receive federal grants and whether landing fees will be altered. Under current law, privatized airports will not receive grants and this will increase the airport’s costs, as well as the landing fees.

Passengers

Effects on passengers depend on whether airport costs will increase and the degree to which the airlines will adjust their ticket prices and flights to respond to the increased costs. When there is a certain percentage increase in prices of tickets, there will be an opposite change of the same percentage in passengers.

The federal government

Under current law, privatized airports do not receive tax exempts and federal grants, this  means that privatization will increase federal government’s revenue, since it will not give out grants and privatized airports will have to pay high taxes.

Conclusion

It is evident that the answer to the limitations of US airlines is privatization, so the existing airport owners will be able to sell or give out a long-term lease to professional airport firms. The results are unimpeachable, since with competition setting in its only logical to provide quality services that will leave the customers satisfied and will keep the airlines on their toes. There are, however, a few impediments to privatization, but it is time for US airlines to join other countries to convert the airports to a for-profit enterprise. This makes the aviation industry more dynamic, competitive and highly profitable.

From the above, it is evident that privatization of airports will greatly benefit all levels of government in terms of revenue; moreover, the private sector will efficiently manage the aviation industry and make it profitable and competitive. This way there will be a great deal of quality services at all levels. The US government should seriously consider privatization of airports, just as other countries have done, to allow the aviation industry to gain profits and develop to greater heights.