Advantages and Disadvantages of Privatizing Airports

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Table of Contents

Introduction
Definition of Airport Privatization
Descriptions of current situations of airport privatization
Advantages and disadvantages of airport privatization
The trend of airport ownership
Relationship between airport privatization and management styles
List of References

Introduction

Airports are being understood as enterprises rather than just public services (Poole, 1994, Para 1). Airport privatization is spreading globally since 1980 covering Australia, Britain and Canada (Neufville, 1999, Para 3). It has become the topic of more concern all over the world (Bardallis, 1998, Para 1). In early 1994 more than 50 countries had airport privatization on their agenda. In developed countries, the government tries to sell partial or sometimes all interests in existing airports but in developing countries the government tries to have long-term franchises for major expansion and modernization. Here private sectors support finance to develop new terminals or whole new airports (Poole, 1994, Para 5).

Government fiscal interest also influences airport privatization that grows interested in this area. In developed countries, the government considers airports as assets and businesses. The traditional views of an airport are mainly public service whose target is to arrive and depart its users at the same time as its costs to be covered but the airport as an enterprise has different views that take airport as entrepreneurial business. It targets the needs of different clients. It takes care of not only airlines and private pilots but also passengers, greeters, staff etc (Poole, 1994, Para 6-7).

Airport privatization is spreading fast in other countries except United States. Developed countries generally avoid investing limited resources in airports that can be financed by other sectors. On the other hand, developing countries look for finances for creating modern and efficient airports (Poole, 1994, Para 8).

Definition of Airport Privatization

Privatization means reducing the government’s involvement in providing services (Airport Privatization: Issues Related to the Sale of U.S. Commercial Airports, 1996, Para 1). Airport privatization is the transfer of airport ownership from the public sector to the private sector (New Interest in U.S. Airport Privatization: Recent and Political Changes, 2007).

Airports and Airlines have been important components of the national aviation system. That is why operational activities have been considered essential for the development of airport business. Here commercial activities do not play an important role. Bearing in mind all these aspects airport property is handled publicly and commercial activities are outsourced to private companies (Frost & Sullivan, 2006, Para 2). The old airport management model has become weak and the government has become considerate about the burden of airport financing. Nevertheless, many airports all over the world are following this model. Presently, governments are understanding airports as profit-making enterprises rather than taking into account them as infrastructure suppliers (Frost & Sullivan, 2006, Para 2).

Descriptions of current situations of airport privatization

In the beginning, airports were managed by states through some government agencies that had sufficient human and financial resources. Over a period of time, most of the airports are still owned by government (state, municipal or provincial government) but some are managed by private sectors. States can ensure safety of aviation where airport authorities directly control airports (Rao, 1999, Para 2).

Such kinds of airport authorities are increasing in great number. The experience from such worldwide developments of airports shows that efficient finance and management have improved. This current situation is clearer where management of airports has been given to autonomous authorities but air traffic services are being controlled by governments. ICAO generally suggests that States are concerned about setting up authorities to manage airports and air navigation services where some improvements could be noticed in finances and efficiencies (Rao, 1999, Para 3).

Autonomous airport authorities are managing things very well since they have financial freedom but their freedom varies according to making decisions related to their activities. On the other hand in absence of such freedom many authorities look for governmental funding. This situation has an extra demand for the governmental resources that may result in delays in development and maintenance activities due to insufficient funds. That is why private sectors are coming forward to take ownership of airports where they can do their operation and management (Rao, 1999, Para 4).

Privatizing major autonomous airport authorities and government-operated airports partly or wholly has become a trend (Rao, 1999, Para 5).

Advantages and disadvantages of airport privatization

Currently not a big percent of the World’s commercial airports are managed by the private sector. Still, the success gained by the private sector pushed others to invest in this venture. There are many factors responsible to make this industry attractive for investors (Frost and Sullivan, 2006, Para 5):

During the last seven years strong growth prospects in air traffic have been observed.
Growth in passenger traffic has improved profit margin.
Strong commercial opportunities still remain to be exploited.
Certain difficulties in entry for new companies in this market that gives chance to existing participants to improve their earnings.
Fewer risks in exchange rate fluctuations as airports revenue is in hard currencies and the dollar or the euro dominate the travel and tourism industry.

Following are some potential benefits of airport privatization (Poole, 1994, Para 32):

Increased Operating Efficiency: The biggest benefit of changing a private operator for a government department is more efficiency in operations. Both private and public sectors have different incentives at work. Private sectors managers are generally analyzed or paid off in part which is on the basis of the economic performance of that sector but public sector does not have such cases. The public sector is considered as civil service where it is difficult to fire an inefficient staff or to reward an outstanding performance given by a staff (Poole, 1994, Para 32).

A private sector can get advantage of economies of scale. A firm that owns many airports can purchase supplies in bulk and operate accounting to support services to all the airports (Poole, 1994, Para 33).

The private sectors are willing to give contracts of functions that can be performed more cost-effectively by other firms. For example the contract of airport fire and rescue service at privately managed Burbank (CA) Airport is given to a private firm (Poole, 1994, Para 34).

Additional Operating Revenues: nowadays airports are being taken as economic enterprises that can generate more revenue than was expected traditionally. Privatization has the potential of turning unprofitable airports into profit centers. The larger airports with greater revenue potential under private management can lead to bigger returns to the current governmental owners. These returns could be either via lease payments or sale proceeds (Poole, 1994, Para 35).

For general airports increased revenue comes from instituting landing fees, encouraging fixed base operators for developing offerings of goods and services and developing airport real estate (Poole, 1994, Para 36).

The revenue opportunities for air carrier airports are bigger. At some points landing fees or rental charges may be below market. A privatized airport firm will have more liberal retail approach having a bigger collection of goods and services that targets not only passengers but also the airport, its neighbors and airline staff. New business opportunities contain conference facilities, providing business services, hotel accommodations and developing airport real estate (Poole, 1994, Para 37).

Most of such activities ask for specialized knowledge and entrepreneurial corporate culture that is not necessarily present in the public sector. There could be a great risk of failure in converting civil servants into entrepreneurs rather than hiring indisputable entrepreneurs to do such activities. Also, competitive process can generate new ideas for cutting costs and increasing revenues (Poole, 1994, Para 38).

Improved Customer Amenities: Privatization can bring a new approach to airport retail activities. London’s Heathrow or Gatwick airports which were privatized via sale in 1987, the new International Terminal No 3 at Toronto which was developed by BOT/LDO (long term franchises for infrastructure facilities are called BOT projects and LDO is lease-develop-operate) in 1991 and the new Pittsburgh Terminal that is managed by BAA have given different experience to their users since they have found that airport retail is different from US airports. Such airport retails are different from US airports in three ways: i) The retail space can be compared with other terminals many times as the size is comparable; ii) the retailers have lots of national and international brand name outlets; iii) the prices are not very high like airport charges but they are like those local shopping malls (Poole, 1994, Para 39).

The new privatized retail approach presents a situation in which all the parties are taken care of. Air travelers go for lower prices and they like variety of goods and services, which result in good sales that are generally two to three times higher than in traditional terminals. The airport operator is satisfied as the higher sales volume brings higher net revenues and the airlines also have good time since concession revenue can cover total airport costs (Poole, 1994, Para 40).

Reduced Risk of White Elephants: The World Bank is now also concentrating on privatization of major infrastructure that includes the airline industry as well for the reason that developing countries can reduce risky investments, like ‘white elephant’ projects which are which are more expensive than their revenue generation. Privatization makes a difference in new project development as it shifts many risks from the taxpayers to private investors. Privatization takes care that project decisions should be made on economic and financial basis, not on political basis (Poole, 1994, Para 41).

Lease or Sale Proceeds: The city or county can recover its investment of land in the airport by selling or leasing the airport, which is done through the lease payments or sale proceeds (Poole, 1994, Para 43).

Disadvantages

Loss of Public Control: It is expected that privatization, through sale or long-term lease, can raise issues about potential loss of public control (Poole, 1994, Para 81).
Economic Regulation: If privatization has monopoly power then there will be an issue of dealing with that power. Any form of explicit economic regulation entails costs and that is why it will not attract potential investors to invest in airports so monopoly problems should be dealt with in less restrictive way (Poole, 1994, Para 92).
Safety: Some have doubts whether privatized airports will be as safe as publicly owned airports. It has to be remembered that regardless of privatization, the FAA will be the airport’s safety regulator (Poole, 1994, Para 93).
Noise: Like the case of safety same rules and regulations related to airport noise will be applied similarly on a private buyer or lessee (Poole, 1994, Para 94).
Liability: Some have doubts whether a private firm can cover the large liability exposure of owning and managing a major airport (Poole, 1994, Para 95).
Bankruptcy: the lease and franchise agreement should have default provisions if the original firm can provide airport services due to bankruptcy (Poole, 1994, para 97).

The trend of airport ownership

Worldwide governments are making policies for owning and managing their airports. Most of the airports around the world were owned and managed by federal governments except in the US. In the mid of 1980s the policies related to ownership started changing. There is a good growth in airline industry. The number of passengers taken by airlines grows at a double rate that of world economic growth. The rate of cargo is more than triple. It has become challenging for the owners of the airports as this situation asks for continual investment. If the airport is owned by a government then there will be an unlimited need for increasing amounts of investment (Tetheway, 2001, Para 1).

1980 was the period when the governments around the world faced loss of pressure from their taxpayers which was to control government deficit (Tetheway, 2001, Para 2).

The United Kingdom became the first country to sell its federal airport system by adopting a new policy. BAA was formed from the three major airports. Now it has become entirely a privately owned sector (Tetheway, 2001, Para 3).

Since 1990s governments from all over the world are following this trend and privatized airports (Tetheway, 2001, Para 4).

Relationship between airport privatization and management styles

As this industry is experiencing rapid changes coming from government policies of privatization, airport managers should have sufficient capacity to fulfill the needs of the customers (Regan, n.d., Para 2).

List of References

“Airport Privatization: Issues Related to the Sale of U.S. Commercial Airports” 1996, Web.

Bardallis, D, 1998. “Airport Privatization is Taking Off”, Web.

Dr.Neufville, R D, 1999. “Airport Privatization Issues for the United States”, Web.

Frost & Sullivan, 2006. “Airport Privatization”, Web.

“New Interest in U.S. Airport Privatization: Recent and Political Changes”, 2007, Web.

Poole R W, 1994. “Guidelines for Airport Privatization” Web.

Rao, A K R, 1999. “Privatization of Airports- Role of the Regulatory Authorities- A Safety Perspective” Web.

Regan P, “The relationship between Entrepreneurial Orientation, Organization Structure and Ownership in the European Airport Industry”. Web.

Tretheway M, 2001. “Airport Ownership, Management and Price Regulation” Web.

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