Introduction
The state plays an important role in every sector of the economy. However, various economic theories were propounded that focus on the extent to which the state should interfere with the economic activities of each country. Without a doubt, the argument about the degree of government interference is based on two contradictory concerns: efficiency and equity. Whereas the United States has from the past preferred private ownership and management of economic resources, there has always been an acknowledgment that some types of economic activities are greatly influenced by the public interest and necessitate a great degree of governmental intervention. The airport industry is a perfect example of “a public enterprise, that is, a type of enterprise that is distinguished from private-sector firms in that they operate as government-approved monopolies that supply an indispensable service to society,” (Garfield and Lovejoy 1964). Taking into consideration the vital role played by airports to the respective countries and cities in which they are situated, in addition to the great costs incurred when putting up and running the airports, the control of the government has never been a problem in the past.
In the United States, the airport system is controlled by a mixture of both the government and private enterprises, thus creating what is possibly one of the best airport systems globally. Nevertheless, several current events have resulted in enhanced attempts at privatizing the state-owned and operated airports, not just in the United States but also in many other countries across the globe. Proposals for privatization of airports offer evidence of the power of the privatization process on the whole because commercial airports have for a long time been regarded as being under the appropriate scope of the state. The customary responsibility of the state of the United States’ aviation industry has been to support the sector through subsidization of the creation and running of the airports’ facilities, as well as applying economic and safety policies to the industry as a means of regulating it. The extent of the government’s involvement in the US airport sector was first challenged in 1978 when the Airline Deregulation Act was passed. This legislation abolished the economic regulations that were used by the government against commercial airlines. Majority of the free market supporters and private stakeholders, influenced by their accomplishment in minimizing the regulation of airlines, focused their attention on further minimizing the role of the state in the construction, possession, and management of airport facilities as well (Poole and Snyder 1993).
The outcomes of airline deregulation have further enhanced the support of privatization of airports. Coupled with rising competition and declining fares, deregulation also resulted in the extensive implementation of hub-and-spoke route approaches by the key carriers. The institution of hub airports has created challenges of acute traffic congestion especially in times of peak travel seasons at majority of the US biggest commercial airports. Simultaneously, organized civil groups have increased their efforts at advocating for an increase in the number of airports in their areas of residence. These challenges have been worsened by falling government investment in airports in the past few years due to budget deficit problems. Severe challenges of insufficient capacity, in addition to the tendency by some managers who persistently run airports as sluggish public monopolies, have led to a sharp disapproval of the historical ways of running airports. The proposals for reform are on the increase daily, the most common of which has been the proposal for privatizing the publicly-owned airport facilities.
Attempts by the US government to privatize the airport industry began in the 1980s. Various administrations such as the Reagan, Bush, and Clinton Administrations made efforts to privatize the publicly-run airports, thereby providing momentum for the privatization proposals (Gesell 1994). The proposals have also been supported by local politicians in many regions where airports are located. A number of cash-constrained local bodies of government desire the additional cash that is likely to result from the complete sale of airports. For example, “Robert Poole, from the Reason Foundation, approximated that the total value of the sale or long-term lease of Los Angeles International Airport would earn the city $1 billion,” (Poole and Snyder 1992). Certainly, airports are among the biggest capital investments that fail to earn the government significant direct earnings due to stringent government regulations and controls that force the owners of the airports to re-invest their proceeds back in the airports for the exclusive purpose of the airports. These prerequisites are founded on worries that local governments might redirect the earnings from airports to other local programs, and hence the needs of their airports would become neglected. Although privatization has many supporters, it also does not lack critics.
Airlines and their major supporting organization, the Air Transport Association, powerfully resist privatization, based on the argument that private owners are most likely to raise fees so as to earn profits at the expense of the customers’ needs. Likewise, the universal aviation industry, private pilots, and their major supporting organization, the Aircraft Owners and Pilots Association, also resist privatization based on the argument that privatization of airports would lead to higher landing fees and the infringement of government grants rules. These organizations support the present airport system, which subsidizes fees thereby keeping them at a lower level than would be possible if the true market forces through privatization were allowed to operate in the airport industry (Payson and Steckler 1992). Privatization of airports is also opposed by labor unions of public workers who argue that privatization would lead to numerous job losses and poor working conditions as a result of reduced bargaining power.
The Federal Aviation Administration’s (FAA) officials also oppose privatization due to the issue of huge long-run investments needed to develop and expand airports. The FAA believes that such huge investments can only be possibly made by the government rather than private investors. In brief, the privatization of airports has grown to be one of the most controversial issues, with strong supporters on each side of the debate. Although there are heavy contentions on each side of the issue, supporters and opposers of airport privatization in the United States take an all-or-nothing stance that fails to acknowledge the truth behind the state of airports in the nation presently (Gesell 1994). This paper will examine the effects of airport privatization by drawing references from other countries that have privatized their airport systems. Countries that will be analyzed in this paper include Australia, New Zealand, Canada and the United Kingdom.
A Study of Airport Privatization in New Zealand and Australian airports
New Zealand and Australia provide a perfect opportunity for studying airport privatization. The two countries have similar political, cultural and economical systems and both depend heavily on air transport because they are island nations.
History of privatization in New Zealand and Australia
Airport privatization in the two countries has been studied by Domney, Wilson, and Chen (2005) using information from four sample Australian airports namely: Melbourne, Perth, Adelaide, and Darwin, and two New Zealand airports namely: Auckland and Wellington. The data of the matched airports permitted the researchers to examine the link between privatization, regulation, market power and performance which can be measured using the level of profitability and technical efficiency of the airports in question. The airports selected for the study give the population of the key privatized international airports in the two countries. This study was conducted by comparing the performance of the airports three years before privatization and three years after their privatization. The only exceptions were the Adelaide and Darwin airports which were privatized much later and for which only data of the first two years after privatization were available. The Bureau of Transport and Regional Economics (BTRE) and the Federal Airports Corporation annual reports for the years 1993 to 1998 provided data pertaining to Australian airports before they were privatized. Data of the Australian airports after privatization were removed from the individual companies’ annual reports and websites. Likewise, respective companies’ annual reports provided data for the New Zealand airports in addition to information obtained from airport operators where the annual reports failed to provide complete information.
Regulation of airports in New Zealand and Australia
Privatization of airports in New Zealand and Australia took place in the late 1990s. Nevertheless, the process of privatization was different in the two countries. In Australia, an ex-ante regulatory regime was adopted which was characterized to a greater extent by government intervention. Direct control by Government regulators is exercised through the imposition of barriers such as price and profit barriers on the airports, so as to prevent the earning of surplus profits at the expense of the consumers (Bos 1994). A major issue of the Australian regulatory regime is the substantial degree of monopoly power held by airports (Hooper, Cain and White 2000). As a result of privatization, the major airports of Australia are regulated using the CPI-X price cap where CPI represents the Consumer Price Index used by the Treasury and X represents the potential improvements in productivity of each airport. Using this regulatory regime, airport owners can alter the prices of the goods and services they offer as long as the prices fall within the range of the price cap, and as long as they inform the government of the motives behind the price fluctuations of their goods and services. Privatization of Australian airports was also accompanied by an investment strategy, namely the “necessary new investment” approach introduced by the government to deal with the problem of incentives for investment under the price-cap regime. The investment approach permits the airport owners to charge prices above the price cap if the investment in question is beneficial to the economy (Forsyth 2003).
Airport privatization in New Zealand began through the purchase of “51.6 percent of Auckland airport by public flotation, and 66 percent of Wellington by Infratil NZ Ltd a publicly listed utility investment firm,” (Air New Zealand and Ansett Australia 2001). Contrary to Australia, New Zealand adopted a comparatively lenient and ex-post regulatory regime that was based on theories of contestability and a belief in the restricted role of the government in controlling the economy (Boston 1991). Airports in New Zealand are required to meet information disclosure conditions as well as price regulation if they want to maximize their monopoly power (Bos 1994; Forsyth 2003). However, the price regulation is eliminated for airports that perform poorly.
Market power of airports in Australia and New Zealand
The market power of the airports is measured using a proxy measure that is based on market concentration, that is, respective the airport’s proportion of total national air passenger movements in 2001/2002. Airports that have higher market power are more able to optimize profits from airlines and travelers. In this study, Auckland had the highest market power (41 percent), followed by Melbourne (21 percent), Wellington (17 percent), Perth (6 percent), Adelaide (5 percent) and Darwin (1 percent). This measure was regarded as more superior to other possible market power measures that involve different modes of transportation and/or types of freight. Because of the fact that New Zealand and Australia are located in remote islands, they pose little competition to international air transportation.
Performance of airports in New Zealand and Australia
In a competitive economic setting, the performance and efficiency of a company can be measured using the firm’s profitability, because the pressure of the market will make sure that optimal performance is equal to profitability (Doganis 1992). In the evaluation of the privatized airport industry, factors such as regulatory, geographical, economic, social and political barriers hamper direct competition and, therefore, alter the price-cost function. This constraint is solved in this study by measuring profitability and efficiency on a separate basis.
Profitability – In this study, airport profitability is measured by the ratio of total revenue to total expenses after depreciation and interest. Even though differences in calculation of depreciation between countries and airports have a profound effect on the levels of costs, it does not pose a big problem because both Australia and New Zealand use similar accounting regimes. Another benefit of using this approach is the abolition of changes in the exchange rate and inflation over time (Doganis 1992).
Efficiency – The technical efficiency of the privatized airports is measured using data development analysis (DEA). This measure is most applicable because it can be used where the inputs and outputs of the enterprise to be assessed lack natural prices. DEA makes comparison of the inputs and outputs of each firm and then ranks them according to the maximal performance measure. The data collected of the measures were analyzed using regression models, specifically the ordinary least square (OLS) multiple regression. The analysis was done with profitability as the dependent variable and privatization, regulation, efficiency and market power as the explanatory variables.
Results and discussion
Majority of the studies that examine privatization show that there is no difference in performance of companies before and after privatization (Martin and Parker 1997; Omran 2004; Florio 2003). The study by Domney, Wilson and Chen (2005) is contrary to these studies because it shows a significant difference in the performance of privatized firms before and after the privatization process. The researchers found that profitability and efficiency are negatively correlated with privatization, that is, privatization decreases the profitability and efficiency of the firms. This result is however similar to the study by Parker and Wu (1998), who found that the performance of British Steel declined after it was privatized. Literature on privatization also shows that firms are likely to report improved performance after privatization, but a deeper reading shows that the goals of privatization are that organizational performance will more correctly portray market forces. This, therefore, permits either an increase or a decrease in a firm’s performance. In the case of New Zealand and Australian airports, the higher profitability before the privatization of their airports could be due to the government’s intervention and protection of the public interest as well as cross-subsidization. The elimination of these market alterations through privatization would lead to reduced profitability, but would more correctly reflect market forces. This assertion is similar to the one made by Boycko, Shleifer and Vishny (1996) who argued that output may decline after privatization if the government can no longer maintain high outputs through subsidization.
A second explanation for the fall in profitability of the airports post-privatization is regulatory failure. Regulatory failure could result from setting incorrect price cap, because of information imbalance between the regulator and the regulated. Excessive profits or losses of the airports could result if the price cap is set either too high or too low. In studies conducted by Martin and Parker (1997) and Saal and Parker (2000), the initial increase in profitability of the privatized British Gas, British Telecom, and the water and sewerage industry was attributed to lax price caps. The reverse scenario could be the case for the regulated Australian airports, where the price cap may have been set at a very low level. This argument is supported by the fact that the Australian government suspends such price regulations for firms that perform poorly. In addition, the low profitability could be used by the airports as a strategy to bargain a more lenient price cap (Bos 1994). In both cases, regulation could have inefficient repercussions for privatized firms, hence giving support to literature that questions the effectiveness of regulatory regimes. It is important to note that these results apply to the regulated privatized airports.
The unregulated airports used in this study show that efficiency is significantly negatively correlated with profitability. An example is the Auckland airport whose profits have consistently increased since privatization but whose efficiency has been on a downward trend. Reports from the New Zealand Commerce Commission stated that, “Auckland Airport has used its market power in airfield activities by raising prices above the efficient level. This reinforces the Commission’s finding that there are insufficient constraints on the exercise of market power by Auckland International Airport Ltd,” (Domney, Wilson and Chen 2005, p.282). On the other hand, Wellington Airport’s efficiency has improved significantly since privatization but its profitability has declined during the same period. The same report by the New Zealand Commerce Commission noted that if Wellington airport’s recommended price increases were implemented, the airport would be subject to regulatory control. The release of the Commission’s findings prompted Wellington airport’s management to introduce a price increase of 27.6 percent for landing fees and 311 percent for terminal fees, thereby raising its general to consumers by 77.7 percent. This action is likely to raise the airport’s profitability.
The regression analysis of the data used in the study shows that Wellington, which has less market power than Auckland, was limited in its capability to raise its profits. However, its successive actions show that it was still in a position to exercise some level of market power over its customers. Therefore, the argument put forward by the monopolistic market theory seems to be a better elucidation of performance in the unregulated privatized airport industry. This is because profitability does not result from improvements in technical efficiency. Instead, market power is used to increase prices and subsequently to increase profitability. This finding supports other prior studies of privatization, which indicate that, when there is little regulation and no competition, privatized firms are able to increase their profitability but not their efficiencies (Martin and Parker 1997; Saal and Parker 2000). Martin and Parker (1997) argue that this phenomenon happens as a result of “privatized companies’ exploitation of their market power in the face of lax regulation or government under-estimating the scope for cost savings following privatization or both,” (p.62). Domney, Wilson and Chen’s (2005) study shows that in economic settings that lack government interference through regulation, privatized firms with significant market power are in a good position of earning monopoly profits.
In regulated markets, the findings show that regulation, rather than efficiency or market power, is the driving force behind a firm’s profitability after privatization. The effect of efficiency in a regulated environment is however not clear. Even though the relationship between efficiency and privatization was not statistically significant, the negative sign shows that privatization leads to decreased efficiency in the regulated Australian market. Two possible explanations can be derived from looking closely at the data of individual airports. The first explanation is that Melbourne airport, which has three-and-a-half times the market share of Perth and Adelaide, has a degree of market power that is comparable to Auckland (whose market share is roughly 2.5 times the market share of Wellington). Melbourne reported increased efficiency after privatization but its profitability declined during the same period. This indicates that regulatory measures control market power but do not necessarily have a negative effect on efficiency. The second explanation is that Melbourne, which has 21 percent of national air passenger movements, has an absolute percentage market share comparable to Wellington. Both of these airports reported improved efficiency but not increased profitability. Nevertheless, as a result of Wellington’s recent price increases, this proportion of national air passenger movements may also be an indicator of market power. This can either be as a result of market power control through regulation or an increase in efficiency and control for the exploitation of market power through competition. Either way, both results support the value of either competition or regulation. The results also back prior studies that put emphasis on the need to initiate competition or, alternatively, regulation (Saal and Parker 2001).
Additional evaluation of the performance of individual airports shows that the Australian airports with the least market power, namely, Darwin, Adelaide, and Perth, suffered the greatest decline in both their efficiency and profitability after privatization. The efficiency and profitability of these firms fell significantly when Ansett Australia, a regional carrier, went bankrupt. These results are in line with autonomous Australian reports, which show that the poor performance of airports due to the collapse of Ansett and the 11 September terrorist attacks led to the suspension of price-cap regulation in October 2001. This result backs prior studies that assert that the performance of firms after privatization may be caused by external factors, for instance, the business cycle (Villalonga 2000).
Airport Privatization in Canada
The Canadian reform of air traffic control (ATC) was considerably inspired by reforms in Australia and New Zealand. Nevertheless, when Nav Canada was established in 1996 through the Civil Air Navigation Services Commercialization Act, the Parliament did not follow the model of those two countries in establishing an autonomous government agency. Instead, the law permitted the creation of a private sector, not-for-profit, and non-share capital corporation, headed by a board of directors consisting of representatives of stakeholders. The outcome has been described as the world’s first fully privatized air traffic control system (Baglole 2001). Nav Canada’s board of directors has fifteen members four of whom are appointed by the Air Transport Association of Canada, which represents the nation’s air carriers. One board member is elected by the Canadian Business Aircraft Association, which represents corporate aviation users, while Nav Canada unions appoint two members. Three other board members are appointed by the government. Sequentially, these ten members elect four extra independent directors. Collectively, these fourteen directors then select the president/chief executive officer from among themselves.
The association between Nav Canada and the Department of National Defense is ruled by a number of agreements. Like in Australia, neither of the two organizations levies charges on the other for providing services in their individual airspace (CANSO 1999). Whereas the military runs its own ATC services, all formal training of military ATC controllers is provided by the Nav Canada Training Institute. This system goes before the establishment of Nav Canada. In the past, the Department of Transport provided training to all civilian and military controllers. Nav Canada has also provided contract training to controllers from twenty-five nations (Nav Canada 2004). Nav Canada’s independent system has been proposed by a United States research organization as the model for ultimate FAA reform (Poole and Butler 2001). An additional explanation is that the government does not provide a guarantee to a company’s debt, and any funds are obtained on the commercial market (CANSO 1999). Preliminary funds to purchase the ATC system from the government came from long-run bank loans and bond issues, with any excess profits reinvested in the company. Under government ownership, the Canadian ATC system had challenges with outdated equipment and under-utilization comparable to those of the FAA. However, since the privatization of its ATC system, Canada now has the world’s most advanced air navigation system (Baglole 2001).
As a result of Canada’s unique approach of placing the ATC provider in the private sector, the question of how the public interest is to be protected arises, especially because ATC is a monopsony. Lovink (1999) has argued that the supporting legislation integrated the opinion that the public interest could be protected through: requiring the company, as a nonprofit enterprise, to reinvest any surplus back into the business; setting up a board composed of stakeholders in the aviation system as discussed above; setting out procedures of how user charges should be developed, including a prerequisite of respecting international obligations; and, permitting appeals by aircraft operators to the Canadian Transportation Agency, a government regulator, where it is alleged that the above principles are not being followed.
Nav Canada experienced significant success in its first few years of establishment. Between 1996 and 1999, the company’s productivity (calculated in flights per employee) rose by 32 percent, airline costs fell by 33 percent, controller salaries rose by 33 percent, and the total number of employees fell by 14 percent, even though none of the retrenched employees were controllers or technicians (WaId 1999). The Canadian privatization reforms have not escaped criticism, especially in the years following 2001. Labor unions have made complaints about not being given the right to decline over time, in spite of noteworthy pay raises since privatization. One labor representative referred to Nav Canada as a financial tragedy, with $176 million (Canadian) in debt and its largest customer, Air Canada, in a bankruptcy trial. Even Nav Canada’s president has referred to the post-2001 downturn in air traffic as a disaster (Carr 2003). In 2003, Air Canada, which represents 28 percent of Nav Canada’s profits, ineffectively filed a petition for a raise in user charges to the Canadian Transportation Agency. This was the first appeal to the agency since the establishment of Nav Canada in 1996 (Poole and Butler 2001). During that time Nav Canada termed the increased charges as a shocker to the airport transportation sector.
Airport Privatization in the United Kingdom
The evolution and current governance of ATC in the United Kingdom is the most complex. There are two key reasons for this. First, the UK government is the only one of those reviewed to have established ATC as a for-profit activity. Second, the UK is also the sole known example of the creation of a share-capital public-private partnership (PPP) for ATC. In the UK, the ATC provider, the government, the nation’s largest airport operator (BAA plc), and a consortium of seven British airlines jointly own the ATC provider, NATS. The NATS Employee Sharetrust Ltd. also owns 5 percent of NATS’ parent company, NATS Holdings Ltd (UK National Audit Office 2004, 6). NATS was originally established in 1962 as an independent government agency responsible for both civil and military ATC. In 1972, the agency became part of the CAA, but was also made responsible to both the chairman of the CAA and the chief of the air staff within the Ministry of Defense (MOD). In 1996, NATS was incorporated under the Companies Act, with 1OO percent ownership by the CAA, in preparation for privatization. At the same time, responsibility for military ATC was transferred back to the MOD. Also, safety regulation of ATC was specifically assigned to the Directorate of Airspace Policy within the downsized CAA (Goodliffe 2002).
The partial privatization of NATS, which was authorized by the Transport Act, 2000, represents a unique exception to the practice of public ownership and not-for-profit structure of ATC providers in other nations. The approach taken by the UK government must, however, be seen in the context of the widespread use of PPPs in the UK. These partnerships are closely associated with the private finance initiative (PFI), originally launched by the Conservative government in 1992 but continued under the current Labor administration. While the Conservative interest in PPPs was strongly influenced by ideological considerations, the Labor government has taken a pragmatic approach, viewing partnerships as a way of dealing with fiscal constraints. PPPs are, therefore, a means of getting private investment to substitute for public funding (Falconer and McLaughlin 2000; Pollitt 2003, 59; Wettenhall 2003). As of 2003, the PFI had led to some 450 contracts underway or completed, with a total value of ÂŁ50 billion (Broadbent and Laughlin 2003).
The choice of a PPP as a way of managing ATC followed an extensive review and consultation process with all stakeholders. The report resulting from the consultation process mentioned above did acknowledge that, while a PPP was the preferred option of the government, no government had yet privatized its ATC provider. A key issue raised included the motivation of profit maximization and cost minimization that would drive a for-profit ATC provider. The government also acknowledged that a PPP was not required to raise capital, as demonstrated by the restructuring of ATC in Canada and New Zealand. Finally, operating ATC with a profit motive would give the CAA an even more important role as a safety regulator, similar to that which the CAA played over the commercial airline industry. Overall, the consultation process did not result in a consensus in favor of a PPP; there was more support for the Canada/New Zealand model of an independent, nonprofit entity (UK Department of the Environment, Transport and the Regions 1999).
The British Airports Authority owns and operates seven airports in the UK: London’s Heathrow, Gatwick, and Stansted Airports, and the airports serving Glasgow, Edinburgh, Aberdeen and Southampton. The firm, which evolved from the 1987 privatization of the British Airports Authority, had 2003 revenues of ÂŁ1,933 million. BAA is therefore heavily involved in the aviation industry, and is one of NATS’ clients, hiring NATS Services Ltd. to perform tower ATC at its UK airports. BAA also holds partial ownership or management contracts in a number of overseas airports, including Indianapolis, Boston, and Pittsburgh (BAA plc 2004). The government matched BAA’s investment, also contributing ÂŁ5 million in share capital and ÂŁ60 million in loans (Woodman 2003). The entry of BAA plc as a white knight has at least temporarily eliminated the possibility of bankruptcy or a government takeover, and the politically important principle of preserving NATS as a PPP has been respected.
The Privatization Debate
In recent years, full privatization of publicly-owned airports has occurred in Western Europe, the former planned economies of Eastern Europe and the Soviet Union, and in the developing world. The most notable sale of a state-owned airport occurred in 1987, when the British Airports Authority, which consisted of seven United Kingdom airports, was sold to private investors in a large public offering of stock (Gomez-Ibanez and Meyer 1993). Airport privatization on this scale has not yet been attempted in the United States, partly due to legal restrictions imposed by the FAA. Nevertheless, several proposals to sell publicly-owned airports have surfaced in recent years. For instance, local officials proposed to sell or lease Los Angeles International Airport, Albany County Airport, and Peoria County Airport (Poole and Snyder 1993). Advocates of complete privatization base their claims on two basic arguments: Privatization will enhance efficiency in the operation of airports, and private investors represent an alternative source of financing for new airports or expansion of existing airports in an era of fiscal distress for many governments.
Efficiency
Privatization advocates argue that the private sector is inherently more efficient than the public sector because private firms are better equipped and more motivated than their public counterparts to be cost-conscious and customer-oriented (Gomez-Ibanez and Meyer 1993). They argue that private firms are not as constrained as public-sector organizations with respect to the myriad of government requirements that delay planning and construction schedules, mandate detailed contracting and human resource procedures, and generally increase paperwork. More efficient private firms, it is argued, translate into lower costs to consumers. According to this viewpoint, purchasing managers in a privatized airport would not be bound by the bureaucratic procurement system that exists in publicly-owned airports. While there is no question that private managers could negotiate lower prices more effectively than could their counterparts in the public sector, it must be noted that the current public procurement system was designed to encourage equity and to prevent corruption and favoritism, with little concern for efficiency.
Opponents of airport privatization argue that efficiency also would be enhanced because private operators would have more flexibility in personnel management. They could hire and fire more easily, and would not be constrained by civil service pay scales or other rigid rules and procedures affecting public employees (American Association of Airport Executives and the Airport Research and Development Foundation 1992). Finally, advocates argue for privatization on grounds that the private sector would build facilities cheaper and faster than the government. They point to the Alliance Airport in Ft. Worth, Texas, which was planned and completed in less than two years, as evidence of the advantages of private participation in the construction of airports.
The 1987 British Airports Authority (BAA) privatization experiment, which resulted in creation of the privatized BAA PLC, is perhaps the most successful example of airport privatization. The BAA PLC has demonstrated its ability to earn revenues and control costs. Its pretax profit grew 49%, to 285 million pounds, in 1993 (Coleman 1994). Privatization apparently has transformed the BAA from an inefficient monopoly into a lean, efficient, customer-oriented company that is earning significant profits. Several smaller-scale airport privatization experiments have met with success in other areas of the world. These include Mexico City’s new international terminal and Toronto’s Terminal 3 at Pearson International Airport, both of which were constructed, and today are owned and operated, by private consortiums. These examples of privatization seemingly provide strong support for the argument that privatization can enhance the efficiency of airport operations.
Critics however doubt the degree to which complete privatization can enhance efficiency. They claim that advocates of full privatization overestimate the gains that might be expected from privatization. For instance, most economic activities at publicly-owned airports have been provided by commercial airlines and other private vendors for most of the history of commercial aviation. This underscores a more general point about the operation of airports in the United States: Publicly-controlled airports always have operated based on public-private partnerships. To the extent that privatization enhances efficiency, then, the gains that might be expected by privatizing airports fully in the United States are exaggerated. Moreover, to the extent that privatized airports are able to enhance the efficiency of their operations, for instance, by expanding airport retailing activities, it likely will come at the expense of transfers from off-airport businesses. This appears to be the case in the BAA privatization experiment. An examination of its revenue streams reveals that most of its income today comes from innovative retailing and leisure activities, rather than traditional airport sources of revenue such as gate leases and landing fees (Gomez-Ibanez and Meyer 1993). Of course, while BAA PLC management’s aggressive expansion of retailing and hospitality activities might represent an increase in efficiency and profits for the airports, a significant proportion of these gains occur at the expense of restaurants, hotels, and retailing establishments in the surrounding vicinity. In this sense, the efficiency claims of privatization advocates may be misleading. While privatization might enhance the efficiency and profitability of airport operations, these gains do not represent necessarily any net gain to society. Thus, from a general societal perspective, airport privatization does not represent enhanced efficiency and profits as much as it does the transfer of profits from one sector to another.
Finally, claims that airport privatization will result in greater efficiency often underestimate the political barriers that would prevent even fully privatized airports from realizing their potential. Even though it is safe to say that privatized airports in the United States would not face as many political constraints as their public counterparts, they would not be free from politics by any means. For example, government rate regulation has limited the privatized BAA PLC from implementing pricing and other incentives to promote the more efficient use of existing airfield and terminal facilities. Ideally, user charges should be priced to cover long-run marginal costs, that is, the incremental costs of landing an additional aircraft or processing an additional passenger. However, to set landing fees to achieve economic efficiency, the BAA PLC would have had to impose large increases on airlines that have proved to be politically untenable (Gomez-Ibanez and Meyer 1993). In short, upon close inspection, many of the efficiency claims made for privatized airports appear to be overstated and based on faulty assumptions. A privatized monopoly of essential goods and/or services inevitably will require regulation, which, of course, imposes costs on producers and impedes efficiency.
Financing
The second major argument for full privatization is that airport privatization would tap an alternative and richer source of funds for financing airport infrastructure. This claim has special appeal in an era when many governments suffer from fiscal distress. Some finance experts suggest that there is a pool of equity investors with a greater willingness to accept higher risks than is true for the typical municipal bond investor. Privatization proponents argue that the private sector is a ready source of capital for airport infrastructure projects (American Association of Airport Executives and the Airport Research and Development Foundation, 1992). Given recent reductions in federal airport capital aid from the Airport Improvement Program and the serious possibility that the program may continue to be targeted for reductions or be eliminated by Congress, the prospect of obtaining capital from the private sector becomes a more attractive alternative. The new source of finance argument also is open to debate. While privatization may attract risk-taking private investors, large public enterprises also enjoy access to lucrative financial arrangements. Public entities such as airports can secure investment capital “by issuing tax-exempt securities in the municipal bond market,” (American Association of Airport Executives and the Airport Research and Development Foundation, 1992). These revenue bonds are secured by the stream of revenues that flows from the enterprise. Thus, an airport’s size (whether measured by passenger boardings, the volume of cargo, or general aviation activity) has been related to its ability to secure investment capital.
Historically, larger airports have received adequate financing, and as a result, have been financially the soundest airports in the United States system and already have ready access to capital. This raises another problem with the full privatization of airports. In the United States, only a relatively small number of financially sound airports are serious candidates for complete privatization. However, United States airports represent a highly integrated system that might be jeopardized seriously if the “crown jewels” were to be sold. Arguably, only about 75 large and medium commercial hub airports and a few hundred general aviation airports in the United States are particularly attractive candidates for privatization. Yet, these airports represent only a fraction of the more than 4,000 publicly-owned United States airports. About 95% of all United States airports are general aviation airports that do not involve scheduled air carrier service (United States Department of Transportation 1990). Many general aviation airports suffer from a lack of demand, and consequently are unable to generate enough revenue to cover their annual operating costs, let alone provide any return on the capital investments required to build them. As a result, general aviation airports traditionally have depended on federal grants for capital needs and on subsidies from local taxpayers to support their annual operating budgets. Thus, the vast majority of publicly-owned general aviation airports would not be attractive candidates for privatization. In addition, many of the airports that are attractive candidates for privatization already are operated as successful public enterprises. Consequently, even if privatizing some airports results in advantages in terms of both efficiency in operation and the ability to generate greater financial resources, the benefits generally are exaggerated. More importantly, the efficiency gains from privatization do not come without significant costs.
The public interest
An important reason to question the wisdom of completely privatizing airports in the United States resides in the different management approaches that characterize the public and private sectors. Unlike private managers, who have the profit motive as their objective, public administrators are charged with serving the public interest. Although defining the public interest is problematic, it encompasses a range of values broader than just the pursuit of profit History is replete with examples of robber barons stripping viable enterprises of their assets through complex financial maneuvers. The experience of leveraged buyouts during the 1980s demonstrates the problems that may result from such risky financing strategies or schemes. The prospect of modern-day robber barons controlling one or more of our nation’s busiest commercial airports poses serious questions regarding the desirability of the more aggressive efforts to privatize airports fully. If private firms serve the purpose of pursuing their own private economic gain through vigorous competitive behavior in the marketplace, the government’s role is to protect the public interest from damage that the private sector might inflict on society at large (Hart 1984).
From its early years, aviation rightfully has been considered a “public good.” Public goods are characterized by two properties: It is neither “feasible” nor “desirable” to ration their use. Because of the monopolistic nature of airports and the externalities associated with transportation, market approaches to airports often have been viewed as inappropriate. Airports are natural monopolies, for which the most efficient form of organization is a single entity. To prevent abuses associated with monopolies, public ownership and/or regulation are required. While the risks of monopoly have been challenged in recent years (Poole and Snyder 1993; Payson and Steckler 1992), it remains a concern among most policy analysts. Although the full-privatization privatization option offers increased efficiency at relatively few United States airports, these gains may be offset by damage to other societal goals. Thus, several alternative types of privatization might be more attractive approaches.
Conclusion
The literature reviewed above shows that privatization in a non-competitive market, such as the airport industry, is complex. Contrary to privatization in competitive markets, where profitability reflects the efficient distribution of resources, the results of privatization in the natural monopoly market show an increase in profits that is incomparable to increase inefficiency. This symbolizes the worst-case situation for privatization. The replacement of a public monopoly with a private monopoly, in which the lack of competition and/or regulation creates negligible motivation for an increase in technical efficiency and profitability, reflects the exercise of market power. These results have great policy implications for countries that want to privatize their airports. Where competition is lacking, a transfer of ownership is not adequate to attain efficiency in the industry, and hence regulation is required to control for market power. On the other hand, where there is no market power, regulation creates unnecessary costs for both companies and the government. In such a case efficiency can be achieved through privatization alone.
Reference List
Air New Zealand and Ansett Australia. 2001. “Price Regulation of Airport Service Inquiry: Submission to the Productivity Commission. Web.
American Association of Airport Executives and the Airport Research and Development Foundation. 1992 Airport privatization: An airport executive’s guide to privatization. Alexandria, VA: Author.
BAA plc. 2004. “About BAA.” Web.
Baglole, J. 2001. “How Canada Soared in Air-Traffic Control-Pioneering Privatization of Air-Routes System Hailed as Model for U.S.” Wall Street Journal.
Bos, D. 1994. Pricing and Price Regulation: an Economic Theory for Public Enterprises and Public Utilities. Amsterdam: Elsevier.
Boston, J. 1991. The theoretical underpinnings of Public sector restructuring in New Zealand, Auckland: Oxford University Press.
Broadbent, J. and Laughlin, R. 2003. “Public-Private Partnerships: An Introduction.” Accounting, Auditing & Accountability Journal 16: 332.
Carr, J. 2003. “Woe Canada! Crichton’s ‘Catastrophe’ No Model for U.S.” Aviation Daily.
Civil Air Navigation Services Organization (CANSO). 1999. “Corporatization of Air Navigation Services.” Web.
Coleman, B. 1994. “Mortars don’t hurt highflying BAA, resilient operator of London’s airports.” Wall Street Journal, p. A15.
Doganis, R. 1992. The Airport Business. London: Routledge.
Domney, M.D., Wilson, H. and Chen, E. 2005. “Natural monopoly privatization under different regulatory regimes: A comparison of New Zealand and Australian airports.” The International Journal of Public Sector Management 183: 274-292.
Falconer, P.K. and K.M. McLaughlin. 2000. “Public-Private Partnerships and the ‘New Labor’ Government in Britain.” Pp. 120-33 in S.P. Osborne, ed., Public-Private Partnerships: Theory and Practice in International Perspective. New York: Routledge.
Florio, M. 2003. “Does privatization matter? The long-term performance of British Telecom over 40 years.” Fiscal Studies 24(2): 197-234.
Forsyth, P. 2003. “Regulation under stress: development in Australian airport policy.” Journal of Air Transport Management 9(1): 25-35.
Garfield, J. P., and Lovejoy, W. F. 1964. Public utility economics. Englewood Cliffs, NJ: Prentice Hall, Inc.
Gesell, L E. 1994. Airport privatization Part I: The rush to deregulate. Paper presented at the 34th airport management short course, American Association of Airport Executives.
Gomez-Ibanez, J. A. and Meyer, J. R 1993. Going private: The international experience with transport privatization. Washington, DC: The Brookings Institution.
Goodliffe, M. 2002. “The New UK Model for Air Traffic Services-A Public Private Partnership under Economic Regulation.” Journal of Air Transport Management 8:13-18.
Hart, D. K. 1984. “The virtuous citizen, the honorable bureaucrat, and ‘public’ administration.” Public Administration Review, 44(2): 111-120.
Hooper, P., Cain, R. and White, S. 2000, “The privatization of Australian airports.” Transportation Research Part E 36: 181-204.
Lovink, J.A.A. 1999. “Choosing the Right Autonomy for Operators of Privatized Government Services: The case of Nav Canada.” Canadian Public Administration 42: 371-86.
Martin, J.C. and Parker, D. 1997. The Impact of Privatization: Ownership and Corporate Performance in the UK. London: Routledge.
Nav Canada. 2004. “International Training.” Web.
Omran, M. 2004. “The performance of state-owned enterprises and newly privatized firms: does privatization really matter?” World Development 32(6): 1019-41.
Parker, D. and Wu, H.L. 1998. “Privatization and performance: a study of the British steel industry under public and private ownership.” Economic Issues 3(2): 133-45.
Payson, J. E., & Steckler, S. A. 1992. Expanding airport capacity: Getting airport capacity off the ground. Los Angeles, CA: Reason Foundation.
Pollitt. 2003. The Essential Public Manager. Maidenhead, UK: Open University Press.
Poole, R., and V. Butler. 2001. How to Commercialize Air Traffic Control. Policy Study No. 278. Los Angeles: Reason Public Policy Institute.
Poole, R W., & Snyder, B. E. 1993. Privatizing Los Angeles international airport: Analyzing the alternatives. Los Angeles, CA: Reason Foundation.
Saal, D. and Parker, D. 2000, “The impact of privatization and regulation on the water and sewage industry in England and Wales: a translog cost function model.” Managerial and Decision Economics 21: 253-68.
United States Department of Transportation. 1990. National plan of integrated airport systems, 1990-1999. Washington, DC: United States Government Printing Office.
UK Department of the Environment, Transport and the Regions. 1999. A Public Private Partnership for National Air Traffic Services Ltd NA TS: A Report on the Response to Public Consultation. London: Department of the Environment, Transport and the Regions.
UK National Audit Office. 2004. Refinancing the Public Private Partnership for National Air Traffic Services. London: The Stationery Office.
Villalonga, B. 2000. “Privatization and efficiency: differentiating ownership effects from political, organizational, and dynamic effects.” Journal of Economic Behavior and Management 42: 43-74.
WaId, M.L. 1999. “Sale of Air Traffic System Has Led to Technical Advances.” The New York Times.
Wettenhall, R. 2003. “The Rhetoric and Reality of Public-Private Partnerships.” Public Organization Review: A Global Journal 31:77-107.
Woodman, P. 2003. “£130m Lifeline for NATS.” Press Association UK. Web.