US airports – is management outsourcing the answer to improving service quality?
As the debate continues to rage about the efficacy of airport privatisation in the United States, another option appears to be emerging, that of the outsourcing of airport management. Several smaller commercial airports are either going through the procedure at this time, have been, or are considering it. It might not be appropriate to giant hubs but it could well be for ‘mom and pop’ regional airports that seek both to reduce their costs and enhance their expertise. And while hardly any private US company seems to be interested in investing in airports there are quite a few that are able to offer management options.
97% of US airports still have government ownership but many are ‘privatised’ by the back door
It could be argued, of course that US airports are ‘privatised’ in the main as it is, in that many of their operational activities are already outsourced, leaving a core of public sector employees in senior management, seconded from the city, county and/or state authorities. The difference now is that it is the top management itself, including the CEO, which has become an endangered species in some parts of the country.
The latest hotspot is Rockford, Illinois, where the commissioners of Chicago Rockford Airport are considering outsourcing the airport’s management instead of appointing an executive director, following a recommendation from four elected officials. The officials, who appoint board commissioners, have urged the search for the executive director be suspended so evaluations can be carried out on private companies. The Greater Rockford Airport Authority is one of the oldest airport authorities in the United States.
Situated a little less than 100 miles to the northeast of downtown Chicago, Rockford is also home to a school of the Embry Riddle Aeronautical University that opened in 2008. Claiming the title of a Chicago airport, at least it is in Illinois. Other airports competing for Chicago’s air passengers – apart from O’Hare and Midway - include one in Indiana to the east (Gary) and one to the north in Wisconsin (General Mitchell). Gary is currently without any commercial air service and was recently rebuffed by Allegiant after the LCC investigated the possibility of a Las Vegas route, at last partly because of railroad tracks that remain stubbornly at the end of the runway.
The Greater Rockford Airport Authority, representing taxpayers, owns the airport. Board members set policy, but are not beholden to those who appoint them. Instead, they are vested to do what’s in the best interests of the airport.
The airport is dominated, if that is the right word, by the LCC Allegiant, with 1,700 seats weekly presently in its typically thin and occasional flight schedule (source: CAPA/Innovata), to and from cities including Las Vegas, Phoenix and Tampa.
What’s good for an arena isn’t necessarily so for an airport
Outsourcing of this nature is not unknown in Rockford where a private company has been hired to operate the town’s arena. However, as has been pointed out, running an airport isn’t the same as running an arena. One local commentator said, “Comparing them, it’s not even apples and oranges. It’s more like apples and vegetables.”
A letter dated 14-Sep-2011 from the four elected officials who appoint board commissioners urges them to suspend the search for an executive director and operations director and instead evaluate private companies that manage airports. Meanwhile, recruiting still continues for a new executive director. Last month (Aug-2011) the board hired Florida-based ADK Executive Search for USD23,000 and up to USD6,500 in expenses to recruit a successor for Executive Director Bob O’Brien, who parted ways with the airport in Mar-2011. The Operations Director, Franz Olson, retired in June; his position also remains open.
The financial health of the airport is said to be good. Through the years, it has managed to build a budget surplus. It started its current fiscal year with USD14 million in the bank before spending USD4.9 million this summer to buy the Tandem Building, since renamed the International Cargo Building. In comparison, the downtown arena has been kept afloat over the years by subsidies from the city of Rockford. Last year it cost the city USD1.1 million.
The prevailing theory in Rockford is that private airport managers might be able to leverage their connections to help build passenger traffic, cargo operations and attract aircraft repair facilities. Rockford Mayor Larry Morrissey is quoted as saying it is not a matter of whether the airport’s business model works. Rather, it is a chance to look at best practices to see if they can improve the airport.
Airport management outsourcing (apart from GA) remains rare
While management of arenas like Rockford’s is common, outsourcing management of commercial airports (as opposed to general aviation facilities) remains very rare. The conventional wisdom has it that public sector employees running airports are very competent.
On the other hand, airports, like other governments these days, are making do with less and have already become lean. While the introduction of private management might reduce direct costs, the third party has to make a profit to justify its involvement, and that is not easy where costs have already been cut to the bone. The alternative is to increase the supply but most US airports the size of Rockford are losing airline service, not gaining it.
One of the leading US companies in management outsourcing, AFCO (Aviation Facilities Company) in Virginia, has already met with Rockford officials.
The outcome of this privatisation-by-outsourcing scenario will be anticipated with interest in Chicago, as the city was the location of the USD2.5 billion deal-that-never-was to lease Midway Airport, one that expired in 2009 when the potential operators could not acquire financing at the height of the credit crunch. In theory it could be resurrected but keeps being put back and new Mayor Rahm Emanuel shows little appetite for it. (Since then, attention has shifted to the anticipated - but also delayed – lease deal on the Luis Marin Munoz airport in Puerto Rico).
Any deal at Rockford would be quite different – Rockford taxpayers will continue to own the airport, as they still do with the arena.
It is certainly the case that outside management can pay dividends for governments. American Airports Corporation (AAC) runs five general aviation airports for Los Angeles County. Last year it paid the county about USD3.5 million, the government’s percentage of total revenue generated at the airport.
Airport management “a growth industry”
AAC argues it has the ability to bring outside investors to properties it manages as well as cost efficiencies and private sector expertise from the for-profit business world. The company’s CEO believes that while private airport management may not be widespread in the US, it is a growth industry. “Twenty years from now, the number of airports that will be managed by private operators will be significantly greater than it is today,” he predicted. “Most of it will be driven by airports that aren’t self-sufficient.” But at the same time he acknowledges that while some companies may be able to help airports with their goals - increasing passenger traffic and attracting cargo airlines by leveraging their connections - attracting that kind of business is more often a matter of location. The reality, with few expectations, is that the marketplace dictates that demand. The airlines are the ones who know if the numbers work. It boils down to the ‘geographics’ of the airport and demand in the local area.
Lehigh Valley airport takes the plunge
While Rockford weighs up the options, one airport that has already made the move into private airport management is Lehigh Valley International, formerly Allentown-Bethlehem-Easton International Airport and operated by Lehigh-Northampton Airport Authority, in Pennsylvania.
The search began there some time ago for a new Executive Director but when interim Executive Director Larry Krauter announced he would be leaving to manage a much bigger airport in Spokane the authority attempted to retain him, while opening the door to a management contract and then appointing another interim CEO.
Subsequently, the authority agreed to negotiate a deal to turn airport its USD20 million per annum value operations over to Virginia-based AvPORTS management (a subsidiary of the aforementioned AFCO since 2009). AvPORTS had submitted a proposal to run the airport for USD330,000 a year. After adding on the salary of the director it would bring in to make staff and operational changes, the cost could be over USD500,000, which is above the USD450,000 the airport was spending on its now-departed executive director, deputy director and administrative assistant. So in this instance there is no cost saving as such.
The new management has a job on. In recent years, Lehigh Valley International Airport (LVIA) has encountered stiff competition from nearby airports such as Philadelphia (75 miles away) and Newark Liberty (80 miles distant). These airports often offer a wider range of flights and sometimes lower fares to boot. This state of affairs was exacerbated by the completion of the Pennsylvania extension of the highway Interstate 78 in 1990, which allowed for a faster drive to Newark, and the opening of Interstate 476 in 1991 that made it easier to connect to the east coast Interstate 95 near Philadelphia. LVIA serves a twelve county area with a population base of 3.6 million people. Traffic has been falling for several years now but 748,000 passengers used the airport in 2010, an increase of almost 12%. Despite the increase the airport is in debt and under pressure to find more of them.
Commuter subsidiaries of American, US Airways, United and Delta provide most of the air service, supplemented by Air Canada Jazz, Air Tran and Allegiant, which operates several Florida services. Continental prefers to run a bus service to Newark Liberty, which says a lot*. The busiest route by some margin is Chicago (though not Rockford).
(* Indeed, the concept of the ‘wingless flight’ is another one that is fast gaining ground in the US. At Fort Collins-Loveland Municipal Airport in Colorado such a service will be introduced within two years and by which passengers will arrive at the airport, park their car, go through security, check in their bags and then get on a ‘secure bus’ that takes them straight to the terminal concourse at Denver Airport for their flight.)
The area is well represented with religious references in its town names (Bethlehem, Nazareth, Zionhill, Quakertown etc), and some of its inhabitants think it will need a miracle to resurrect the airport.
Much the same might be said of California’s Ontario International Airport, which has also been losing traffic heavily (-32% in 2010). Moves to privatise it (a genuine lease deal in this case) were thwarted at least temporarily earlier this year when Los Angeles City Council, the owner of operator Los Angeles World Airports (LAWA), decided to oppose state legislation that would shift control of the airport to a new authority made up of officials of the ‘Inland Empire’ (the four-million population city-region to the east of Los Angeles) as the first stage of a lease privatisation drive. Ontario officials have sought to take control of the facility, claiming they could do a better job at keeping and attracting carriers than LAWA.
In May-2011, the California Senate approved a bill that would create a local public-sector operator for Ontario airport. The City of Ontario, in which the airport is located, sold it to Los Angeles World Airports in 1985, but the bill would apparently force LAWA to give it to the new entity. LAWA earlier this year invited expressions of interest in leasing the money-losing airport, under the federal Airport Privatisation Pilot Program of 1996.
Subsequently, the state bill to create the framework for an airport authority was frozen by its author and that remains the case.
LAWA had issued a Request for Expressions of Interest (RfEoI) in Ontario Airport right back in Jan-2011 and at the time it was believed that the aforementioned AFCO/AvPorts and American Airports Corporation were in the frame. To conclude this article, here is a brief overview of the US companies which could operate commercial airports either within the terms of management contracts or (within consortia) bid for lease deals. Some are committed to the GA sector presently. There is hardly any prospect whatsoever of any of them pitching for foreign (non-US) contracts right now. Outright real estate companies are not included.
|AFCO/AVPorts||Dulles, VA||Developer/operator/lessor of airport facilities primarily in the US, also Canada, UK and Japan. Builds and operates new facilities. Possibly the world's first privatised airport operating company as Pan Am World Services in the 1920s.|
|AIRIS Corporation||Houston, Tx||Aviation facility development company (possibly the world's largest private company in this field) concerned with planning, construction, and finance issues to position airlines and cargo carriers in airport facilities. Works mostly in the US, but also in Sweden, Ecuador and China, with a collective value of more than USD2.3 billion, now entering Vietnam market.|
|Airport Property Ventures||Los Angeles, CA||A privately-held company that was formed in 2007 to operate, develop, and market general aviation airports and aviation facilities throughout the United States for the purpose of maximising value through efficient operations and strategic on-airport real estate development. Submitted EoI for the operation of Los Angeles’ area Ontario Airport, currently operated by LAWA.|
|ADC & HAS||Houston, Tx||Joint US-Canadian venture that was the developer and concessionaire of T3 at Toronto International Airport; concessionaire of a new terminal in Budapest; manages airports in the Caribbean and Latin America, and is currently bidding or investigating opportunities in Croatia and Vietnam. Has a co-operation agreement with a Canadian pension fund.|
|Allegheny County Airport Authority||Pittsburgh, PA||Now the operator of Pittsburgh Airport, the ACAA is also part of a consortium bidding on the Puerto Rico airport lease. But it also operates the much smaller Allegheny County Airport and could be attracted to management of such airports in the US.|
|American Airports Corporation||Santa Monica, CA||An operator principally of private General Aviation facilities in the US since 1997 and one of the largest general aviation airport management companies in the country. Submitted EoI for the operation of Los Angeles’ area Ontario Airport, currently operated by LAWA.|
|Propeller Investments||New York, NY||Private equity firm currently seeking to privatise a GA airport at Gwinnett County, Georgia, and convert it into a second commercial airport for Atlanta.|
|Westcore Properties||San Diego, CA||A private airport investment and development company dedicated to the development of regional airports – but presently only across Europe, where it has a subsidiary company.|
|Linc Facility Services (Parent company ABM)||Alexandria, VA||Mainly a provider of management and operation of operational facilities - from baggage handling systems, to ground service equipment and jet bridges but also terminals.|
Further information on these and many other companies may be found in CAPA's Global Airport Investors Database , published by CAPA.