25-Nov-2018 12:41 PM

U.S. Airport Privatisation programme expanded, regulations eased

Analysis

The U.S. Airport Privatisation Programme, framed in 1996 when the concept of privatisation of airport infrastructure there has lost its initial popularity from the 1960s, is widely regarded as out of date and unfit for purpose.

Accordingly, the FAA reauthorisation bill which has just been passed has introduced the potential for any airport to be leased and for grants to be made available to individual airport-owning authorities to investigate the potential for public-private deals, amongst other measures.

But the crucial capability of a single airline to veto a deal has been retained.

Summary

The FAA has expanded the U.S. airport privatisation programme
Any airport can be leased, and without limit
FAA grants available to analyse potential leases
But no change yet on airline double super-majority authorisation rule

The Federal Aviation Authority (FAA) reauthorisation bill which was passed by Congress this autumn contained a provision which passed under the radar outside the U.S. It considerably expanded what was known as the Airport Privatisation Pilot Programme, which was enacted by Congress in 1996 and which was then slightly expanded from five to 10 airports in 2012.

Airport privatisation was a new and untried idea in the U.S. in 1996, and the regulations framing the original pilot programme reflected that. It permitted only five airports to be leased in the long-term.

Only one of those could be a 'large hub' according to the FAA's interpretation and at least one must be a general aviation (GA) airport. It also imposed a lengthy and convoluted approval process, by airlines serving the airport in question and by the FAA.

Any airport may now be leased

The first change made by Section 160 of the FAA reauthorisation act removes the numerical and categorical limitations. Henceforth, any U.S. airport may be long-term leased, and without limit. That means the situation that prevailed for six years, when the City of Chicago held the only slot in the programme reserved for a large hub airport (Midway), cannot re-occur. The proposed lease of one large hub cannot hold up or preclude other large hubs from seeking to do likewise.

Accordingly, the programme has been renamed the Airport Investment Partnership Programme and that 'partnership' insertion suggests the future importance of public-private partnerships (P3s). Moreover, the term 'privatisation' as used in the UK and some other European countries generally means the sale of all or part of the ownership of the airport in question although it can also refer to any financial involvement by a private company.

Since both the 1996 U.S. pilot programme law and the 2018 revised version permit only long-term leases, these deals are inherently long-term P3s between the airport owner (city, county, state, etc.) and the private consortium that wins a competitive process to lease, improve, operate, and manage the airport.

A new role for the public sector partner

Another important change is that henceforth long-term P3 leases can be structured in a way in which the public sector partner has a part-interest in the special-purpose entity created to manage and operate the airport for the term of the lease. Such shared-control agreements are increasingly common in Europe, notably France and Germany.

Politically, that may reduce opposition to U.S. airport P3 leases created by fear that the public entity will "lose control" of the airport (although that can be addressed in the long-term lease agreement by a range of negotiated performance measures, etc.).

Airport owners no longer require to repay FAA infrastructure grants

Another highly significant change is that while the previous law permitted the FAA to exempt the airport owner from having to repay previous federal airport grants if it leased the airport, the new law automatically exempts the airport owner from having to do this. This removes an obstacle that increased the risk of potential U.S. airport P3 deals compared to foreign ones.

The previous requirement was inconsistent with Executive Order 12803 on Infrastructure Privatisation, as well as being unfair, since the airport is in any case still required to comply with an array of "grant assurances" in exchange for having received those federal grants.

New FAA grants to fund investigations of potential P3 deals

In another small but important change, the new law will make it easier for airport owners to make serious assessments of whether to make use of long-term P3 leases. Doing this responsibly requires detailed legal and financial analysis, which is generally beyond the experience of city or state legal and financial staff.

The new law allows the FAA to make grants of up to USD750,000 to any U.S. airport that wishes to analyse whether, and how to go about, engaging in P3 leases under the Airport Investment Partnership Programme.

Airline double super-majority requirement is retained

There is some disappointment that the new law did not change one provision of the original pilot programme that is considered a uniquely U.S. obstacle to getting privatisation approval, namely the requirement for airline approval of the deal via a double super-majority. Specifically, 65% of all the airlines serving the airport must approve the deal terms and also airlines representing at least 65% of the annual landed weight at the airport. In other words, a majority of airlines could approve a lease but it might be blocked by the largest of them in terms of movements.

The good news on this issue is that airlines involved with three such long-term P3 lease deals have accepted the negotiated deal terms that were acceptable to private-sector bidders. Those were Southwest at Midway Airport (procedure ultimately withdrawn), American and JetBlue at San Juan International in Puerto Rico (not a state but an unincorporated territory of the U.S. - procedure successfully completed), and American, JetBlue and United at Westchester County, NY (procedure in limbo). So there is at least historical precept in such cases.

The comparative power of the largest airline(s) by off-peak time movements at Chicago Midway, San Juan International, Westchester County and St Louis Lambert airports (w/c 19-Nov-2018)

Chicago Midway	San Juan International

Westchester County	St Louis Lambert

The airports currently in the privatisation programme that are outstanding appear in the table below. 'Outstanding' can mean a long time.

Airport/state	Date of preliminary acceptance into programme	Formal current status
St Louis Lambert/Missouri	24-Apr-2017	Ongoing. The City was authorised to select a private operator and submit a final application.
Westchester County/New York	02-Dec-2016	The County was authorised to select a private operator and submit a final application.
Hendry County Airglades/Florida	18-Oct-2010	The airport sponsor and private operator are preparing a final application.

If the St Louis lease is completed, it will be the largest one so far. Lambert International Airport handled 14.7 million passengers in 2017 compared to 8.4 million at San Juan.

Other airports that may seek a lease deal, but which are not yet in the programme, include Nashville, while earlier in 2018 speculation arose subsequent to the 'Infrastructure Plan' proposed by President Trump, that the Washington airports could be leased. For further information see the CAPA report President Trump's new infrastructure plan: potential for aviation and private airport financing and the research publication Airport Finance & Privatisation Review 2018

This report is based on an article which appeared in the Reason Foundation's 'Airport Policy News', November 2018. To hear more on the state of the US aviation market, join us in Denver (18-19 March), at the 2019 Americas Aviation Summit. Click here for details.