Incentivizing US airport privatization

Executive Summary

While the United States has mostly private utilities and has had several decades of long-term public-private partnerships in highways and transit, all but one of its commercial airports are government-owned. By contrast, as independent researchers have identified the benefits of airport privatization—such as significantly better performance—governments in Australia, Europe, Latin America, and portions of Asia have privatized large fractions of their commercial airports, via either outright sale or long-term public-private partnership (P3) leases.

Congress has enacted several versions of a law to permit government airport owners to enter into long-term P3 leases of their airports. To date, only San Juan, Puerto Rico, has entered into such a lease, although planned leases of Chicago Midway and St. Louis Lambert attracted significant investor interest.

Several federal bodies have looked into why airport privatization has not caught on in the United States. Airline opposition is no longer a significant factor, with airline-friendly lease terms worked out for the three cases noted above.

The policy that could most likely open the US airport privatization market appears to be tax changes to put US airport financing on a level playing field with countries where airport privatization and public-private partnerships are widely used.

This report explores two tax law changes. One would remove the requirement that tax-exempt airport bonds must be paid off before there is a change in control, such as a long-term lease.

The other would expand the scope of successful surface transportation tax-exempt private activity bonds (PABs) to include airports and other transportation infrastructure.

These changes would enable airport owners to receive an amount closer to their airport’s gross value, rather than the net value after paying off the outstanding tax-exempt bonds. Data in this report show that long-term P3 leases could yield windfalls for the owners of many large and medium hub airports. In some cases, the airport owner’s proceeds could be enough to pay off a significant portion or all of the jurisdiction’s unfunded public employee pension liability. The proceeds could also go toward needed but unfunded infrastructure projects or toward reducing other indebtedness.

Introduction

Over the past three decades, airports in many developed countries have been privatized, via either sale to investors or long-term leases generally referred to as public-private partnerships (P3s).

Data from Airports Council International (ACI) before the COVID-19 pandemic found that in Europe, 75% of passengers used privatized airports. Similar figures were found for passengers in Latin America (66%) and the Asia-Pacific (47%).

By comparison, only 1% of passengers in North America use privatized airports.

The only privatized US commercial airport is San Juan’s Luis Muñoz Marín International Airport, which was leased as a P3 in 2013.

With more than 400 airports worldwide either sold or long-term leased to investors, researchers now have enough data to analyze privatized airports’ performance compared with traditional government-owned, government-operated airports. The largest of these studies, a 2023 working paper by Sabrina T. Howell et al., found many benefits at airports where the investors included infrastructure investment funds, which operate airports as real businesses. The changes include

• More airlines, serving a larger number of destinations;
• Lower average airfares due to increased competition, including from low-cost carriers;
• Increased airport productivity; and
• Greater passenger satisfaction, as measured by ACI’s annual Airport Service Quality survey.

One factor in these improvements is the rise in airport groups (such as Aeroports de Paris, Aena Aeropuertos, Fraport, VINCI Airports, and Flughafen Zurich). By managing multiple airports, such airport groups benefit from economies of scale, standardized practices, and a pipeline of experienced managers who can move up to larger airports.

Congress has encouraged US airport privatization since enacting an Airport Privatization Pilot Program (APPP) in 1996, which allowed up to five airports to be leased as a P3. That program was expanded to 10 airports in 2012.

Most recently, in the 2018 Federal Aviation Administration (FAA) reauthorization legislation, Congress replaced the APPP with broader legislation, the Airport Investment Partnership Program (AIPP). It opened the program to all US commercial airports, reduced other restrictions, and, for the first time, allowed the proceeds from an airport P3 lease to be used for general government purposes by the airport owner (rather than being restricted to investments in airport improvements).

Yet since that landmark legislation, not a single US airport has been leased as a P3, though several have tried. St. Louis in 2019 offered a long-term P3 lease of Lambert International Airport. Eighteen international teams responded, and the highest-ranked dozen made detailed in-person presentations to the city government and its advisers. In addition, the airlines serving the airport developed a pro forma agreement with the airport. But the mayor terminated the process due to regional political opposition.

This report explores a possible way to make US airport privatization more attractive to airport owners by proposing a level financial playing field for potential private-sector airport investors, similar to what already exists for US surface transportation P3 infrastructure. Those changes would result in larger upfront lease payments, in addition to the performance improvements noted by Howell et al.

This paper was produced under a joint AEI–Brookings project, and the full report is available here:

Incentivizing US airport privatization

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Source: https://reason.org/policy-study/incentivizing-us-airport-privatization/