US airport privatisation prospects boosted by additional slots, but is the demand there?

There are a number of factors weighing on the prospects for what, so far, has not been a successful stab at privatising America’s airports in a ‘pilot’ programme that is now 16 years old. They include delays to reauthorisation of the bill that funds airport projects through the FAA’s Airport Improvement Programme; the lapse of the emergency regulation that removed the application of the Alternative Minimum Tax to airport bonds; lingering suspicion in too many local and regional government departments as to the motives of private investors (especially foreign ones); and most recently a change in the law that permitted an extension in the number of privatisation ‘slots’, irrespective of the demand, and which is at least one positive development. 

Congress finally agreed on a four-year bill to ‘reauthorise’ the activities of the Federal Aviation Administration (FAA) after no less than 23 short-term extensions had been made since the previous one expired in Sep-2007. However, the nature of the legislation means that four FAA accounts are frozen in the light of the economic and financial downturn, including the air traffic control modernisation programme and the Airport Improvement Programme (AIP). The level of the AIP has been reduced as well, by USD165 million to USD3.35 billion.

Moreover, the failure of Congress to increase the cap on the amount airports can charge passengers through the Passenger Facility Charge (PFC) means that the value of the charge, which was set in 2000, has shrunk in value in real terms from USD 4.50 12 years ago to approximately USD 2.38 now, according to Airports Council International North America. Larger airports had offered to relinquish their AIP grants in favour of setting their own PFC level, as occurs in most of the developed world where there are privatised airports, and notably in neighbouring Canada, where there are hardly any (only commercialised ones). But Congress continues to view PFCs as federal taxes rather than as localised measures to assist airports as an alternative to the established federal system.

According to Bob Poole, Director of Transportation Studies at the Reason Foundation, the fraction of FAA's budget coming from the federal general fund has soared, from about 11% in FY2002 to over 30% in FY2011, and would have been more had the Administration's FY2012 budget proposal been implemented. There will be little or no general-fund money available for transportation infrastructure investment in the coming years. So while Congress is unwilling to increase federal aviation user taxes, federal investment in airports and ATC modernisation will decrease, as the general fund is no longer available to bail out the Aviation Trust Fund (which is fed by the aviation user tax revenues).

Mr Poole adds that what he calls the airports' "Moses Initiative" – to liberate airports from dependence on AIP grants in exchange for the freedom to self-fund via locally determined PFCs – looks likely the only realistic way to ensure adequate capital investment in the nation's airports.

Pilot programme still on autopilot

Another way would be if more airports embraced privatisation but, whichever way you look at it, the results of the pilot programme are neither spectacular, nor do they engender much confidence for the future.

The airport privatisation pilot programme, which dates back to the Clinton era, is designed to allow airports to generate access to sources of private capital for airport improvement and development. The 1996 Reauthorisation Act, Title 49 United States Code §47134, authorised the FAA, to establish the pilot programme. It initially permitted up to five public airport sponsors to sell or lease an airport with certain restrictions, and to exempt the sponsor from certain federal requirements that could otherwise make privatisation impractical. These restrictions specifically and critically permit an airport operator to sell a general aviation airport, but limit commercial service airport operators to leasing arrangements. Most commercial service airports in the US are owned and operated by local or state governments. Public-use general aviation airports are both publicly and privately owned. 

As of Feb-2012 there were four airports in the programme:

Chicago Midway Airport (IATA code MDW) (Currently occupying the ‘main hub’ airport slot)

A ‘large air carrier hub airport’, owned and operated by the city of Chicago, it handles more than 17 million passengers and 253,000 aircraft operations (data from calendar year 2008). The City also owns and operates Chicago O’Hare International Airport.

Status: The FAA expects to receive a revised preliminary application including a revised timetable and a distribution ready copy of a request for qualifications or interest from the city of Chicago by 30-Mar-2012. The timeline for this revised application has already been extended several times. A change in the political leadership in the city reduced the emphasis on the lease transaction that had been driven by the previous Mayor.

As the pilot programme can only include one large hub, airport applications for other large hub airports will be placed on a standby list so while Midway’s intent is undecided it is blocking other large airports – except there aren’t any.

Hendry County Airglades Airport (2IS)

Airglades Airport, a general aviation reliever airport in Clewiston, Florida, is located 80 miles from Miami International Airport. The airport is owned and operated by Hendry County. The airport has a 5603ft runway, a general aviation terminal and hangars. Hendry County’s preliminary application was approved by the FAA on 18-Oct-2010.

Status: The airport sponsor is negotiating an agreement with a private operator. It is understood that the attraction of the airport would be as a cargo, rather than passenger alternative to Miami, although Miami is established as one of the world’s leading airfreight airports. Under the pilot programme legislation, the airport could be sold rather than leased.

Luís Muñoz Marín International Airport (SJU)

Luís Muñoz Marín International Airport, a medium-hub airport is owned and operated by the Puerto Rico Ports Authority. Puerto Rico is an ‘unincorporated territory’ of the US. In 2008, the airport had 4.6 million passenger boardings. The FAA approved the Authority’s preliminary application for the Luís Muñoz Marín International Airport on 22-Dec-2009.

Status: The airport sponsor published a Request for Qualifications in Jul-2011 and pre-qualified six potential bidders to submit proposals, there having been global interest. The Puerto Rico Ports Authority expects to select an operator during 1Q2012. There have been some delays as the political objections that have become commonplace were raised.

Gwinnett County Briscoe Field Airport (LZU)

Briscoe Field, a general aviation reliever airport in Lawrenceville, Georgia, is located 37 miles northeast of Atlanta, Georgia. The airport is owned by Gwinnett County. LZU had 83,458 aircraft operations and 236-based aircraft in the 12-month reporting period ending Mar-2009. Gwinnett County’s preliminary application was approved by the FAA on 26-May-2010.

Status: The airport sponsor must submit a revised timetable for completing the programme. There has been vocal local opposition to the sale of a Georgia facility that it is proposed to turn into a reliever airport for Atlanta, which is one of few major US cities with only one commercial airport. There is only known to be one interested party, a New York-based private equity fund, Propeller Investments.

So what the Programme boils down to after 16 years is one ‘major hub’ airport (which it isn’t really as it handles predominately low cost point-to-point flights with little hubbing activity, especially when compared to Chicago O’Hare) and where the prospects for a deal to be resurrected are slim; one small-medium sized airport that is not even in the US proper; and two Georgia airports with limited potential to become commercial relievers to very large primary airports, either for passengers or cargo.

But it is those airports that have been part of the programme or which dropped out of the running that tell the real story. The table below, which omits those four airports still ‘active’ is intuitive.

Airport name



Brown Field Municipal Airport

San Diego, CA

Application withdrawn 2001

Louis Armstrong New Orleans International Airport

New Orleans, LA

Application withdrawn 21-Oct-2010

New Orleans Lakefront Airport

New Orleans, LA

Application terminated 2008

Niagara Falls International Airport

Niagara Falls, NY

Application withdrawn 2001

Rafael Hernández Airport, Puerto Rico

Aguidilla, PR

Application withdrawn 2001

Stewart International Airport

Newburgh, NY

The first commercial service airport to participate in the FAA's privatisation programme from Mar-2000 to Oct-2007. The Port Authority of New York and New Jersey now operates the airport after taking over the lease (and has also found it had to make a success of the airport).

There was a flurry of applications followed by withdrawals in 2001. In the case of New Orleans, where a desire has existed at one time or other to privatise both the GA (Waterfront) and commercial (Armstrong) airports, local politicians opted to draw back from the latter on the grounds that the time “was not right”. That is understandable in that New Orleans is still in the post-Hurricane Katrina recovery stage, quite apart from the lack of available capital for such an airport project in that region and under those circumstances.

Stewart Airport’s seven years in the private sector

But the most interesting case was New York State’s Stewart International Airport, situated some 60 miles north of Manhattan in a mixed middle class residential/high-tech industrial area. That airport at least was privatised, and on a long 99-year lease, but it was to one of the ‘early adopters’ into the business from the surface transport sector, the UK’s National Express company, which also operated airports at East Midlands and Bournemouth in the UK as well as a large bus fleet, while also dabbling in trains and school (yellow) buses. Few of those early adopters remain in the business now and to many observers it was of no surprise when National Express’ US division exited airports after seven and a half years, and just as the first moves were being made to lease Chicago’s Midway Airport, which sent out the wrong message on that transaction. Neither was it a surprise that the airport headed back into the public sector.

Newburgh Stewart Airport capacity by carrier (seats per week): 19-Mar-2012 to 25-Mar-2012

Other than the airports mentioned here, other notable examples of US airport privatisation are few and far between but they do include two that lie outside the scope of the FAA’s remit in the privatisation programme.

Firstly, Missouri’s Branson International Airport, which has featured on several occasions in Airport Investor Monthly since it opened in May-2009   as the US’s first green field, wholly private airport, without receiving any form of FAA funding, which gives it the right to allocate exclusive operating licences. The rationale behind the airport was to facilitate access to the small city of Branson, which is one of America’s ‘music capital’s, attracting several million visitors each year but quite often by slow surface transport as the nearest airport, Springfield (now Springfield-Branson) was 50 miles away.

Bold move

It was a bold move and one that looked at one stage as if it would not come off as the airport found it difficult to attract and more so to retain services, which had implications for its debt obligations. However, by the end of 2011 it established regular service by Frontier Airlines and AirTran (Delta), also (on and off) the local Branson Air Express, which collectively serve some large cities (for example, Atlanta, Denver, Houston, Chicago but not so far to any northeast city) while regional services will commence in May-2012 to Milwaukee and two other US ‘music capitals’ namely Austin (SXSW and other events) and Nashville, the spiritual home of country and western music.

Branson Airport capacity by carrier (seats per week): 19-Mar-2012 to 25-Mar-2012

The other is New JFK’s Terminal 4, which has been developed as a private-public management enterprise since 2001. It is operated by JKF IAT, which is wholly owned by Schiphol USA, a subsidiary of the NetherlandsSchiphol Group, under a 50-year lease agreement from the Port Authority of New York and New Jersey (PANYNJ). The enterprise dates back to a period in the late 1990s when the then-Mayor of New York, Rudolph Giuliani, was experimenting with different privatisation methods, and at one time had the notion of privatising out the whole of the PANYNJ’s airport estate.

The only major passenger terminal not controlled by an airport or airline

In the absence of a conclusion to the Midway deal, it remains the only large scale example of airport privatisation in the US; being the only major passenger terminal that is controlled neither by an airport authority nor an airline (and proving that privatisation of individual terminals at a big airport can work). It was originally conceived by Schiphol Group and partners LCOR and Lehman Brothers to mimic the airport city concept that was in place at Schiphol Airport. That concept did not work, mainly because of security design faults that coincided with ‘9/11’ but the fact that Delta has committed to its part in a USD1.2 billion expansion project now under way suggests that lessons from the past have been learned.

But that just about sums up the entire scope of airport privatisation in the US. For sure, some of the very early examples, led by Lockheed, Pan Am and their offshoots have not been mentioned here. Neither have the dozen or so airports that expressed an interest to the FAA in privatisation – mostly within the last three years – without actually taking that interest much further. And there are still a few ‘live’ cases dotted around the country that might be classed as ‘fringe’ such as the Ontario Airport in California, owned by Los Angeles World Airports but sought by the City of Ontario and other ‘Inland Empire’ (a concomitant region of the Los Angeles metropolitan area to the east) authorities as a first step towards some form of privatisation. According to ACI North America, there is evidence of a growing desire for more local control like this, whether or not it comes in the form of public-private relationships.

Too much too late?

So it is almost amusing to find that the FAA has condescended to increase the number of available slots to 10. This means that where there was one slot open before the reauthorisation, there are now six slots open. But is that simply too much ‘capacity’, too late in the day?

Background information


What does FAA’s acceptance of the preliminary application mean? An airport sponsor who wants to participate in the airport privatization pilot program must receive preliminary FAA approval, through an application process, to reserve one of the five slots available under the program. Once the FAA approves the preliminary application, the sponsor can select a private operator to manage the airport, negotiate an agreement with the private operator, and prepare a final application for submittal to the FAA.

Application process. A public airport sponsor and the private operator selected to purchase or lease an airport may request participation in the pilot program by filing an application for exemption under Title 49 United States Code §47134(a).

1 A public sponsor may submit a preliminary application for FAA review and approval. It must contain summary narratives identifying the objectives of the privatization initiative, a description of the process and a realistic timetable for completing the program, current airport financial statements, and a distribution ready copy of the request for proposal. The FAA has 30 days to review the preliminary application.

2 When the FAA approves the preliminary application, the applicant is guaranteed one of the five slots in the program.

3 The airport sponsor may select a private operator, negotiate an agreement, and submit a final application to the FAA. There is no timeline for the FAA to complete its review of the final application.

4 After the FAA reviews and approves the final application and lease agreement, it publishes a notice in the Federal Register for a 60-day public review and comment period.

5 The FAA completes its review, prepares its Findings and Record of Decision (ROD), addresses the public comments in the ROD, and publishes the agency decision.

6 If the FAA approves the ROD, it monitors the legal settlement and transfer of the airport from public owner and sponsor to the new private operator and sponsor.

Number and category of airports. The legislation authorized five airports to participate in the program. At least one must be a general aviation airport and no more than one large hub air carrier airport may participate. Under the pilot program, general aviation airports may be leased or sold, but an air carrier airport may only be leased.

Exemption from federal requirement. The 1996 Reauthorization Act permits the FAA to exempt an airport sponsor from certain requirements that could otherwise make privatization unattractive. First, the public airport sponsor may receive an exemption to use the lease or sale proceeds for non-airport purposes. Generally, all proceeds from the lease or sale of airport land must be used for the capital or operating costs of the airport. This exemption requires the approval of 65 percent of the air carriers at the airport (by number of carriers and by landed weight). The FAA also can exempt a public sponsor from an obligation to repay federal grants and return property acquired with federal assistance upon the lease or sale of the airport.

Conditions for granting exemptions. The FAA approval is based upon a number of conditions listed in Title 49 United States Code § 47134. These include the private operator’s ability to assume the public operator’s grant obligations, and ensure continued access to the airport on reasonable terms. The private operator must operate the airport safely, maintain and improve the airport, provide security, mitigate noise and environmental impacts, and abide by existing collective bargaining agreements. The public operator must provide a plan for continued operation of the airport in case of bankruptcy of the private operator.

Federal assistance. The private operator of an air carrier airport may receive Airport Improvement Program (AIP) grants, collect Passenger Facility Charges, and charge reasonable fees. Airport rates and charges that exceed the Consumer Price Index require approval of 65 percent of air carriers. Private operators of general aviation airports can receive AIP discretionary grants.

Federal oversight. Airports in the pilot program must comply with

Title 14 Code of Federal Regulations Part 139 and with Transportation Security Administration requirements for airport security.

Supplementary information:

(a)    FAA document Docket 28895, Airport Pilot Privatisation Programme, Application procedures: http://www.faa.gov/airports/resources/publications/federal_register_notices/media/obligation_private97.pdf (37 pages).

Link to the FAA’s Airport Improvement Programme web pages: http://www.faa.gov/airports/aip/

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