October 19, 1999

October 19, 1999 | Commentary on Regulation

Airport Privatization...The Windfall Denied US Cities

WASHINGTON-Cities across the United States could pocket hundreds of millions of dollars for local projects by selling or leasing their airports to private companies. So why don't they?

Because the Federal Aviation Administration won't let them, and the FAA reauthorization bill Congress is about to vote on does nothing to fix this problem.

Private airports are not illegal-some 3,000 smaller ones across the country operate on a for-profit basis-but those that receive federal funding are effectively precluded from privatizing by the FAA.

The agency interprets any federal investment in an airport as a de facto property right that allows the FAA to impose restrictions that make privatization nearly impossible.

At a time when many countries are reaping the benefits of privatizing their airports, Congress seems determined to make U.S. airports more dependent on government.

The FAA reauthorization bill will boost federal subsidies to airports further still, bucking a worldwide trend that has weaned dozens of airports from government subsidies.

Great Britain pioneered the trend in 1987 when it sold seven airports, including Heathrow and Gatwick, in a public share offering for $2.5 billion.

The new owner, BAA PLC, has since invested more than $5 billion in the seven airports and last year alone paid $340 million in taxes on profits to the British government. Contrast that with U.S. airports, most of which are tax users.

Over the last two years, more than 60 airports were sold or leased to private owners around the world, from Australia and Mexico to Germany and Italy. Because these transactions occurred recently, the prices (or rents) paid by investors can be used by local U.S. officials to determine the potential value of their airport.

It turns out many American cities are sitting on a source of extraordinary untapped wealth.

Using the "per-enplaned passenger basis," an industry rule of thumb that ties the value of an airport to the number of passengers it serves each year, the potential worth of the top 71 U.S. airports falls somewhere between $90 billion and $100 billion.

Consider Atlanta's Hartsfield and Chicago's O'Hare, the nation's busiest airports. Each serves more than 30 million passengers a year and each may be worth as much as $5.5 billion.

In Atlanta's case, that breaks down to $13,500 per city resident, or $90,000 per student in the public schools. New York could gain up to $5 billion through the sale of Kennedy and LaGuardia airports.

Both Los Angeles International and Dallas-Ft. Worth could fetch more than $4.5 billion each, while Miami International might bring in as much as $3 billion.

Even the smallest airport on the list, El Paso International in Texas, may be worth $300 million, hardly an insubstantial sum.

Of course, these estimates reflect broad averages. What investors may actually be willing to pay depends upon such things as physical condition, prospective local taxes, existing labor contracts and growth prospects.

The estimates must also be adjusted for any outstanding debts the airports owe, and the depreciated value of past federal grants that must be repaid if the airport is sold.

Nevertheless, because all but two of these airports are owned by local or state governments, their potential worth represents a windfall that communities could use for other public purposes, such as schools or tax relief. The airports' income and assets would thereafter yield a steady stream of tax revenues to all levels of government.

Local governments can draw another important lesson from the worldwide privatization trend. Although the 60 airports sold or leased worldwide in 1997-98 went for an average of $116 per passenger, the actual prices varied greatly, from $225 per passenger in Perth, Australia, to $32 per passenger in Naples, Italy.

The crucial determinant: whether the new private owner had to operate in partnership with government. For partial sales, under which the investor agreed to joint ownership with the government, the average price per passenger was $81.

But for "100 percent" sales, the average price per passenger was $162, suggesting that continued public-sector involvement carries considerable costs.

Airport privatization could be a winning issue for Congress. But for now, lawmakers have proven themselves not interested in reducing the government's role in a successful private industry.

RONALD D. UTT, a research fellow at the Washington-based Heritage Foundation (www.heritage.org), was associate director for privatization in the administration of President Ronald Reagan.

About the Author

Ronald D. Utt, Ph.D. Herbert and Joyce Morgan Senior Research Fellow

Related Issues: Regulation

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