The 'airport lease-to-pay-down-municipal-debt' argument surfaces again – this time in Baltimore


Apart from public-private partnerships (P3s) to build specific infrastructure, the concept of the privatisation of airports (by leasing) has faded in the US, despite strong interest from abroad.

In fact, it could be argued that it never took off at all, with there being just one successful deal, another that lasted a few years, and another still that is not yet completed after having begun in 2012; all that being the sum total of activity in 26 years.

One attraction that has always been there is the potential for municipalities to earn enough from an airport lease to pay down some or all of its pension debt, or 'asset recycling' as it is now known. And there is a lot of pension debt.

Now the Washington Post has published an article suggesting that Baltimore-Washington, one of three airports serving the capital region, could be leased for that very purpose.

It has opened up a can of worms.

  • Privatisation of airports through leasing has not been successful in the US, with only one successful deal in the past 26 years.
  • Baltimore-Washington Airport (BWI) is being proposed for lease to pay down pension debt in Maryland.
  • The proposal suggests that leasing BWI could generate up to $1.6 billion to reduce the state's pension debt.
  • The previous attempt to lease BWI in 2010 was rejected due to concerns about job creation and value beyond cost-cutting.
  • The Washington Post op-ed argues that long-term airport leases can improve services and provide additional revenue for governments.
  • The recent sale of Sydney Airport in Australia could pave the way for more airport transactions in the US.


  • A joint proposal is put forward by a think tank and a public policy institute to lease Baltimore-Washington Airport (BWI).
  • BWI is one of three airports serving a large and important region of the US and has its own niche market.
  • Its owner has considered a lease previously but rejected it, because it was overly emphatic about cost-cutting rather than job creation.
  • This proposal is specifically aimed at paying down pension debt in the state of Maryland, which is something that has been discussed in other cities since the Airport Pilot Privatisation Programme was announced in 1996.
  • But the sum raised may only go a little towards reducing that debt.
  • This would not be an ideal time for a transaction in order to get a realistic valuation, but international services are set to return in the next few months.
  • At lease there is clarity in what the state would require.
  • The abandoned St Louis lease proved that there is solid interest among foreign investors in US airports, despite the inherent difficulties.
  • The Sydney Airport deal in Australia may act as a catalyst towards encouraging this and other transactions in the US.

No take-up of the US airport investment programme since St Louis lease fell through

It is a quiet time for airport leases in the US. The most recent, but abandoned, project was at St Louis, where there were many non-US bidders of international repute to lease and manage the Lambert International Airport.

However, despite the fact that the process was made easier, was expanded, and had had several restrictions lifted from 2018 when the 1996 Airport Privatisation Pilot Programme evolved into the Airport Investment Partnership Programme [AIPP] (and despite the evidence from the one, single successful airport lease, in Puerto Rico) - those measures failed to generate interest from other municipal (city, county or state) authorities.

But P3s remain popular

One positive trend to emerge, and one highlighted consistently by CAPA during the past few years, is the increase in public-private partnership (P3) deals by which individual items of infrastructure can be repaired and replaced, or built from scratch, with private sector input; usually terminal buildings, but car rental facilities and people movers have also been financed by this method.

Nine out of only 12 lease proposals have been withdrawn or terminated since 1996

But whole-airport lease activity has dried up.

The Federal Aviation Administration (FAA) keeps a table of all proposed and actual transactions on its website (see: Airport Investment Partnership Program, formerly Airport Privatization Pilot Program - Airports). It makes for sorry reading.

Of just 12 proposed transactions since 1996, nine were withdrawn or terminated. The only successful one, where the private sector went on to lease the airport and continues to do so, was the Luis Muñoz Marín International Airport in Puerto Rico (2013), as mentioned earlier.

What is now New York Stewart International Airport was leased between 2000 and 2007 but reverted to public ownership and management when the lease was surrendered in 2007.

Airglades deal sits in limbo still; is 12 years old

There is one outstanding application, for the Hendry County and Airglades Airport, LLC in Florida, where the developer's intention is to create a cargo reliever airport for Miami Airport out of a general aviation facility.

This process is, unbelievably, 12 years old this year. It was in Nov-2010 that the FAA published a notice that it had accepted the Airglades Airport into the Airport Privatisation Pilot Programme.

A final application was filed in Aug-2019, but there were certain caveats related to environmental studies, and the developer has asked for several extensions to provide financial documents; the latest being in Jul-2021 when the FAA approved a nine-month extension until 13-Apr-2022.

And that is pretty much the measure of it. Two successful transactions out of 12, one of which was terminated, over a period of 26 years.

There have been years when interest, at least, in airport leases was high

On the other hand, it is notable that there have been periods when there was a high degree of 'interest' in the privatisation opportunities, if no actual action.

In one year there were eight airport authorities seeking information from the FAA, but that's as far as it went in each case. There are a couple that sought information at the same time as St Louis, one of them being Nashville, which should not be entirely discounted; they could still re-emerge as contenders.

And there have been occasions when airports have been suggested for privatisation by other authorities.

At the time of the emergence of the AIPP out of the original Pilot Programme in 2018 the then US president (Trump) suggested that the two Washington airports, Reagan National and Dulles, could be leased. That might have caused security headaches for the Secret Service - and certainly for the operator - but many capital city airports around the world are wholly or partially privatised or publicly listed, including those in London and Paris.

Asset recycling reared its head at an early stage

Another feature of the 'privatisation process that never was ', especially in the early days, was the potential opportunity for an authority to reduce its debts by raising cash through an airport lease, or 'asset recycling' as it has come to be known.

The regulations applicable to the use of such cash have always been a little vague, but very large authorities such as Los Angeles and Chicago have at one time or another considered such an option for such purposes.

In Chicago's case it made two failed attempts to lease the mainly domestic Midway Airport (but not O'Hare), and it is understood that Los Angeles considered doing so early on in the Pilot Programme. The economic situation is sufficiently poor in California generally at the moment that it is perhaps a surprise that more cities there are not considering such an option right now.

Observers believe it could benefit the Baltimore-Washington airport

In both of those cases the opportunity to relieve pension fund debt entered into the equation.

Fast-forward to 2022 and a suggestion is being made that another authority could lease its airport and for the same reason. On this occasion it is the third airport to service the Washington area: the Baltimore Washington Thurgood Marshall Airport (BWI).

The Washington-Baltimore metropolitan area (WBMA) is noteworthy in a number of ways.

WBMA is a combined statistical area consisting of the overlapping labour market region of the cities of Washington, D.C., and Baltimore, Maryland. The region includes Central Maryland, Northern Virginia, three counties in the Eastern Panhandle of West Virginia, and one county in South Central Pennsylvania. It is the most educated, highest-income, and fourth-largest combined statistical area in the United States, with a population just short of 10 million.

Only three other US city-regions have three or more airports serving them apart from WBMA, and they are New York/Newark, Los Angeles and the (San Francisco) Bay Area.

BWI the 'local' airport for many government and associated workers

While Baltimore is a relatively poor city, with a high crime rate, many Washington-based government workers live in and commute from Maryland cities outside Washington's 'Beltway' (ring road). BWI is accordingly their airport of choice for leisure and business travel, even over Dulles, which is situated to the west of the capital. Moreover, several non-US airlines have benefitted over the years from operating into BWI by providing discounted ticket options for international passengers into the Washington area, the most government-intensive region in the world.

Location of BWI, US

BWI's passenger traffic growth had been slightly better than that of Dulles over the past 10 years until the last three before the pandemic (2017-19), when it fell behind.

Baltimore/Washington International Airport: passenger numbers/growth, 2011-2021

But as with many US airports, the pandemic has ensured that BWI is mainly a domestic airport for the time being, with only 6% of its seat capacity in the international realm.

Southwest the largest airline by far

The three-runway BWI is a stronghold for Southwest Airlines, for which the airport is the main northeast operating base.

Southwest has 71.5% of the capacity presently and 70.7% of movements. The second largest airline is a ULCC, Spirit Airlines, but it only has 8.7% of capacity. Thus 83% overall of capacity is on LCCs while only 16% is on full service carriers.

There are currently no foreign airlines operating into BWI. Most of the international seats (76%) are to and from the Caribbean and Central America and all of the top seven international destinations are in these two regions. Accordingly, there is no trans Atlantic traffic at present, although that could well return when coronavirus pandemic regulations are eased.

BWI is slowly catching up on its pre-pandemic capacity, and at the beginning of 2022 was within 86% of it compared to the same week in 2020.

International routes and airlines scheduled to return in May-2022

It is difficult to determine at this stage what BWI's future will be, from these statistics. Its role may remain that of a secondary airport dominated by short haul low cost airlines on domestic routes, or it could rapidly attract international airlines back with various business models. A number of them are scheduled to begin international service from May-2022.

Whatever the case, this would not be the best time to consider a lease.

Washington Post op-ed suggests the time is right for BWI to be leased, to pay down pension debt

But that was exactly what was proposed in a recent 'op-ed' (private comment, opposite the editorial page) article in the Washington Post, titled "Maryland Should Lease Out BWI to Pay Off Its Pension Debt."

The article was jointly authored by the president and chief executive of the Maryland Public Policy Institute and a quantitative analyst for the Reason Foundation (the Reason Foundation is a US think tank which, inter alia, champions privatisation across the transport and other spectra).

The article cited the estimated USD2.3 billion market value of BWI, which was extracted from a 2021 Reason Foundation policy study.

It goes on, "After paying off outstanding BWI bonds, the net proceeds from a lease would be around USD1.6 billion. Using these [BWI lease] funds to pay down pension debt could reduce future pension costs for the state. Maryland is spending USD1.8 billion a year in contributions to the pension plans, and USD1.4 billion of this is going toward debt payments. Maryland could free up a portion of its budget each year by using the revenue generated from the airport lease to pay down part of this pension debt.

"Maryland had USD20 billion in pension debt at the end of 2020. This debt stems from unfunded pension benefit promises in both its teachers and regular state employees' pension systems. Maryland, along with most other states, saw record-high investment returns for its pension plans last fiscal year, but even this 27% return won't prevent rising pension costs for employees, retirees and taxpayers."

Up to USD1.6 billion could be secured that way

"Maryland needs to find a way to pay down this debt. One source of new funds state policymakers should explore is payments from a long-term lease of the state-owned Baltimore-Washington International Marshall Airport. A study from the Reason Foundation estimates the Baltimore airport could be worth between USD1.6 billion and USD2.3 billion via a long-term lease to private airport companies and investors. The airport has USD642 million in debt and, after paying off those bonds, the state could net USD1.6 billion from a long-term lease of BWI."

The article then goes on to explain the lease process.

"Leasing an airport involves a state or local government entering a long-term public-private partnership. The typical airport lease is 40 to 50 years. Most often, private companies provide the entire long-term lease payment up front, but they can also choose to issue a down payment and provide scheduled payments over time, as was the case with the lease of the Luis Muñoz Marín International Airport in Puerto Rico. The revenue generated could be used for other purposes, such as updating or maintaining existing infrastructure - often referred to as infrastructure asset recycling - or paying down other government debt."

However, airport leases seem to be narrowing in fact; 30 years is becoming more common.

The European scenario card is played

It continues by following a well-worn path, referring to the predominance of the private sector at European airports, something the US government has overlooked, despite the fact that most of the bidders for US airport assets come from that continent and that Europe is where the expertise in these matters mainly lies.

"Throughout the world, privately managed airports are becoming the norm. Many large and medium airports in Europe are either fully or partially privatised and are generating revenue for public use, something governments in the United States are missing out on."

"These long-term leases can be a win-win for governments and airport customers if properly designed. Ensuring that there is a transparent leasing process, enough competition between companies bidding on the assets and that there is buy-in from airlines is key to designing successful lease agreements."

The 'airlines' buy-in' is a reference to the 'double majority rule' - the need for airlines representing 65% of the capacity and landed weight at an airport to support a lease proposal. While some provisions of the Pilot Programme were overturned by the AIPP, that was not one of them. It could be a problem at BWI, but Southwest has been supportive of projected lease deals in the past, for example at Chicago Midway where it currently has over 90% of movements and capacity.

The notion has been considered previously but rejected

The article goes on, "This idea is not entirely new to Maryland policymakers. In 2010 the state considered full privatisation of the airport in an attempt to shore up debt. However, the plan fell through when then-Gov. Martin O'Malley (Democrat) felt that the deal offered was not reflective of the true value of the airport. In addition, he believed that the private company needed to act as a job creator and bring value beyond just cutting costs.

"Whether an airport lease must meet every one of those requirements is subjective, but experience in other countries demonstrates that it is possible to address these concerns within the details of a lease agreement.

"However, given the size of Maryland's pension debt relative to the potential value of the airport, the state would need to consider additional policy reforms to fully fund retiree benefits and prevent the growth of future unfunded liabilities. These reforms should include lowering investment return assumptions so they are more in line with market realities and creating a plan to fully pay off the pension plan's debt within a realistic time frame.

"If well executed, long-term airport leases can improve the quality of airport services and provide additional revenue for government bodies. Maryland should strongly consider leveraging BWI to help the state at least partially address its serious pension funding shortfalls."

Of many comments to the op-ed piece, one stood out.

It said, "The proposed lease would be equal to about 10% of the pension liability, which isn't particularly large. Why couldn't the state improve the profitability of the airport itself and keep all of the money itself?"

That comment would be appropriate in 'normal' times, but improving the profitability of BWI will likely take several years by way of growing business from the current base, and that assumes an end to the COVID-19 pandemic and to mitigation of its economic offshoots, such as racing inflation. If it were to be done by cutting costs, that is precisely why privatisation was rejected in 2010.

A clear set of priorities is emerging

In a nutshell, what the State of Maryland would need even to consider at this time is an offer which:

  • Is long enough as measured by the lease period to guarantee returns for each party, given that 'normality' may not return for several years, and that another 'Black Swan' event could arise rapidly and unexpectedly;
  • Values the airport realistically*;
  • Pays down sufficient debt to make the transaction viable to the lessor;
  • Is proactive in areas such as job creation and retention, rather than merely reactive to cost concerns;
  • Sets out to identify and solidify a niche market for BWI;
  • Can fashion the airport into an exemplar for its class and as a metaphor for what the region stands for.

That is a tall order, but the irony is that globally there are many firms who can do just that. Over 20 of them, either solo or in consortiums, turned up for the St Louis lease but never progressed past the RoI stage as the proposal was torn up under political pressure.

Washington is at the zenith of political pressure and any bidder would be aware of that. Nevertheless, what would count as the 'hub' airport in the original pilot programme (when it was limited to one) would be very attractive to most of them.

The Sydney Airport deal in Australia paves the way for a potential resumption of M&A activity in the US

* Perhaps surprisingly, the article did not mention the deal to sell Sydney Airport to a consortium of Australian and US investment funds, one that has been finalised in recent days and generated a sale price (USD16.8 billion) equivalent to 44 times its earnings in the year ending 30-Dec-2020.

It is the first major transaction to take place in the sector since the pandemic started, allowing for those in Japan, India and Brazil (which were already under way), and one of the biggest the world has ever seen.

It sent out a message that investors will still pay the going rate for airports.

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