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Obama responds to decaying US infrastructure with USD50 billion plan – airports to benefit

US President, Barack Obama
US President, Barack Obama
  • Political drivers behind the statement;
  • Infrastructure generally is surprisingly poor;
  • 150 miles of runway to be reconstructed or rehabilitated;
  • High-speed rail will be a challenge to aviation but may not deliver all the anticipated benefits;
  • Infrastructure Bank to replace need for private lease financing?

US President Barack Obama has announced a six-year comprehensive infrastructure plan to expand and renew roads, railways and runways in the US, with an initial investment of USD50 billion. It could go as high as USD700 billion.

The plan would build on the investments already made under the American Recovery and Reinvestment Act (2009) and also create jobs for US workers to strengthen the US economy. Under the plan, 150 miles of runway will be rehabilitated or reconstructed and the long-awaited NextGen ATM system will also be installed. Part of the plan involves investment in high-speed rail, also the creation of an investment infrastructure bank, both of which also have repercussions for airport investment.

Obama’s new and comprehensive infrastructure plan is part of efforts to jump-start the spluttering US economy. To date his policies have had little effect and the US Federal Reserve, in its Aug-2010 meeting, stated it expects economic recovery to remain sluggish in the coming months, noting that real GDP growth was noticeably weaker in the second quarter of 2010 than most had anticipated, and monthly data suggested that the pace of recovery remained sluggish going into the third quarter. The unemployment rate rose to 9.6%, from 9.5% in Jul-2010. The signs are clear that the US economy is faltering.

But apart from the overtly political aspect to the decision, the fact remains that US infrastructure remains of a surprisingly poor quality, is underfunded, and often receives poor grades from government agencies. The announcement was made on Labor Day, which traditionally marks the start of the mid-term election campaign and the President knows that no matter what else he has achieved, his administration will be judged by its record on the economy. In 2009, a report from the country's leading civil engineers found that the state of the country's infrastructure had not improved in the past four years. The "report card" from the American Society of Civil Engineers gave the US a D grade for its roads, public transport and other basic services, saying an estimated USD2.2 trillion was needed for repairs.

The plan will invest about USD50 billion initially in roads, railways and airports as well as high-speed rail and the creation of an infrastructure bank. To pay for it, the administration would raise taxes on oil and gas companies. Specifically, the air transport sector targets are:

1. Runways

To rehabilitate or reconstruct 150 miles of runway. The Administration proposes to invest in the nation’s airports by improving their runways and other equipment and facilities. The failure to do so recently has been in part due to the inability to pass the FAA Reauthorisation Bill, a slimmed down version of which was approved earlier this year by the Senate (Mar-2010) and Congress (Jul-2010). Runway infrastructure remains the liability of the state and the FAA pays for runway repairs and construction through its airport improvement programme which itself is partly funded by airport taxes. US airport terminals are often operated by airlines with spare gates leased out to other airlines though in some cases a foreign entity has taken on the role of manager/owner (such as Schiphol Group at New York JFK). So this part of the scheme does not attempt to tackle the need for more terminal infrastructure. That requirement may, however, be met by the proposed infrastructure bank (see point 4).

2. NextGen

It also proposes a "robust investment" in efforts to modernise the nation’s air traffic control system, NextGen. This investment will help the FAA and airlines to install new technologies and, among other improvements, move from a national ground-based radar surveillance system to a more accurate satellite-based surveillance system – the backbone of a broader effort to reduce delays for passengers, increase fuel efficiency for carriers, and cut airport noise for those who live and work near airports.

3. High-speed rail

The President has previously spoken of his intention to improve America’s decaying rail network, promising USD8 billion to help construct new rail corridors around the country shortly after his inauguration. His idea then echoed that of the Governor of Pennsylvania, to "end air travel of less than 500 miles". "Imagine, he said, whisking through towns at speeds over 100 miles an hour, walking only a few steps to public transportation, and ending up just blocks from your destination."

In the first instance he would build on the dozen or so high-speed rail corridors already designated.

There were, however, issues such as the cost of some of the plans. California’s alone would cost five times the entire USD8 billion budget. Many of the plans would make trains only relatively high-speed, speeding them up from 80mph to 110mph. Moreover, multiple road crossings require trains to move more slowly than, for example, in Europe. Adding to the problem, many passenger trains run on track owned by freight railways, thereby potentially requiring a whole new line infrastructure at vastly more than the suggested budget. Congestion makes service less reliable.

Eighteen months on and there is still only one line that comes anywhere the concept of a "bullet train" in Japan or the TGV in France, that is the Acela line in the northeast, and on the congested trails between Boston and Washington, DC, these 150mph trains seldom achieve their top speeds.

This time out the President has been more specific rather than just living a dream. In his Labor Day speech he laid out plans to construct 4,000 miles of railroad lines, some of it to carry high-speed trains. While foreign companies will no doubt play a role in America’s high-speed rail future, last week, the Department of Transportation announced system-wide manufacturing standards for bi-level rail cars (and later single-level cars) to promote the domestic industry. A uniform standard creating a level playing field and economies of scale would allow US-based manufacturers to compete more effectively. The President’s plan would also invest in a long-overdue overhaul of Amtrak’s fleet.

High-speed trains could be in operation between San Francisco and Los Angeles in California and Tampa and Orlando in Florida by 2015. Other intercity rail projects are also receiving funding, which prompts the question of how much more money and steady investment is needed for a nationwide high-speed network, and where it will come from.

The President seems to be getting more serious with his rail schemes but it does not signify the end of the road for the domestic air transport business, at least not in the way it does in the UK where the government wants to abolish all internal air travel in favour of rail. The Amtrak network is still responsible for some 5% of non-private vehicle transport. Some rail services might well replace air travel at remote locations where air service has been lost (and there are plenty of those) but there are many air routes of over 500 miles in the US and still large tracts of the country where there is no passenger rail service to speak of, and probably never will be.  Principal cities like Phoenix, Las Vegas and Denver would not be included in any of these corridors. No coast-to-coast services are envisaged, or anything remotely like that. Furthermore, unless the rail service can get up to speed – and that means up to 200 mph or more – it is not seriously going to trouble established air routes. There are many impediments to achieving that goal.

4. Infrastructure Bank

Although the runway repair and construction proposal does nothing to tackle the need for new or better terminal facilities, the President’s fourth proposal might, as well as helping build new runways. He proposes to fund a permanent infrastructure bank. This bank would act as a giant PPP processor, leveraging private, state and local capital to invest in national and regional infrastructure projects that are most critical to economic progress. This marks an important departure from the federal government’s traditional way of spending on infrastructure through congressional earmarks (legislative provisions that direct approved funds to be spent on specific projects, or that direct specific exemptions from taxes or mandated fees) and formula-based grants that are allocated more by geography and politics than demonstrated value. Instead, the bank will base its investment decisions on clear analytical measures of performance, competing projects against each other to determine which will produce the greatest return for US taxpayers on merit.

The proposals would require congressional approval, which some analysts say is uncertain amid concerns about the size of the federal deficit. One leading Senate Republican stated the plan "should be met with justifiable scepticism" because it would raise taxes.

What would the infrastructure bank mean for airport privatisation?

But if we assume that Obama is successful in getting this infrastructure bank approved, up and running in what remains of what looks increasingly like it might be his single term of office, what might that mean for airport privatisation in the US? Despite the lack of slots available under the 1996 Privatisation Pilot Programme (which really needs to be revised now), upwards of 15 airports have made clear their attraction to the concept with more waiting in the wings though perhaps not too keen yet to let that be known. Both New Orleans and Puerto Rico’s Luis Marin airports are actively chasing a slot while Briscoe Field airport in Gwinnett County, Georgia, is after the GA airport slot. There is still every chance that the City of Chicago will propose Midway Airport for the major hub slot for the second time before its time runs out, with a revised template. The conventional wisdom at the moment has it that the deal negotiated with Midway’s airlines – which was non-negotiable for bidders – was unduly restrictive first time out and that the Illinois legislation granting exemption from property taxation for a leased airport also prohibited any expansion of Midway’s boundaries, which would seriously constrain its growth potential.

In the aforementioned case of Terminal 4 at New York JFK Airport, the Schiphol Group has recently acquired full ownership of the terminal having previously held 40% of it, a quiet example of privatisation that has passed by almost unnoticed.

Branson Airport struggling to service its debts

Meanwhile, the private greenfield commercial scheduled airport (a concept very common to India but virtually unheard of in the US) at Branson, Missouri, has entered its second year of operation. Actually, Branson is having a tough time of it at the moment, adding gravitas to the opinions of those who argues it could "never succeed". The gap between projected and actual passenger figures is wide and owing to those lower passenger numbers, the company is having trouble meeting its debt-service payments. Cash flow problems have arisen as a result of the city government’s withholding of USD153,000 due for 2009 under a “pay-for-performance” agreement between the city and the company. However, there is some good news. This month AirTran is increasing the number of flights between Branson and Atlanta, and Branson AirExpress is beginning new services to Chicago Midway and Indianapolis. AirTran and Frontier have been achieving good load factors of around 82%. So now it is a question of whether growth in passenger numbers occurs at a high enough rate to cover debt service. Whether or not Branson survives is important to the entire concept of airport privatisation US style and during the recession that concept has definitely gained ground within the US itself.

For example, Dr Stephen Van Beek, a former executive vice president of Airports Council International-North America and now CEO of the Eno Transportation Foundation, recently opined that “as funding sources decline, airports will increasingly consider other options for financing capital improvements, including privatisation”. One conclusion is that suggests that airport directors themselves, not just cash-hungry mayors and city managers, may look to privatisation as a means toward increased airport investment.

Leigh Fisher Management Consultants (part of the Jacobs group) weighed in by releasing a brochure entitled “Privatisation: An Alternative for Addressing Today’s Challenges”. It concluded that “a number of factors are likely to give rise to a new realism for airport privatisation, including less financial aid available from state and federal programmes and less readily available credit and capital than before the credit markets crunch.

But if the infrastructure bank goes ahead, would there be any openings left for aspiring foreign investors, or would all infrastructure requirements be channelled through the bank, which, one would presume, would be given the express task of providing that ‘declining funding? This question must also allow for the increasing preference for public bond financing, even in a country where that technique is already honed to perfection, since the AMT tax was suspended on these transactions. Just this month Chicago O’Hare International Airport stated it plans to issue USD1 billion in new bonds to continue funding the airport’s USD3.3 billion expansion project in a bid to keep the project progressing while the airport persuades American Airlines and United Airlines to contribute funding.

Best opportunities are outside the pilot programme

Perhaps the best airport privatisation opportunities in the "infrastructure bank era" might be those outside of the federal Pilot Programme. As David L Bennett, an independent US consultant specialising in federal airport policy and regulation pointed out in Air and Space Lawyer recently, it is possible to lease a commercial airport without going through that programme, and therefore not being subjected to constraints such as the 65% airline approval requirement. Without that approval, a city cannot take lease payments off the airport, and must use them solely for airport purposes.

But cities with multiple airports (e.g. Chicago, Houston and Los Angeles with two commercial airports, New York/New Jersey with three etc,) or any number of them with one commercial airport and several general aviation airports) could lease one and use the lease revenues to invest in the other(s) - and do so without airline approval or going through the formalities of the Pilot Programme. Mr Bennett also notes various forms of hybrid lease-management arrangements, such as the long-term concession that developed the USD1.4 billion Terminal 4 at JFK and its subsequent transfer to Schiphol Group; the recent lease and management contract for Oceanside, California’s GA airport.

Transportation Research Board investigates privatisation

There is still life in the old dog yet. The US Transportation Research Board’s Airport Cooperative Research Programme has a current project on airport privatisation. It aims to produce a guidebook for those considering privatising all or part of a US airport, ranging from commercial service airports to general aviation airports. The research will review existing regulations, summarise current private-sector involvement at US airports, and provide an overview of airport privatisation worldwide, along with case studies. The consultant doing the research will also assess the US regulatory and policy framework, as well as current interest and trends in US airport privatisation.

So infrastructure bank or not (and President Obama may have as difficult a time with that as he did with healthcare reforms), do not write off the privatisation ‘movement’ in the US yet. As if to emphasise how uncertain it is that government funding will find its way to airports, the US airline and aerospace industries also lodged a claim for a big slice (perhaps all) of the initial USD50 billion package.

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