Reasons for Airport Privatisation

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Table of Contents

Introduction
Efficiency Improvements
Investment Sources and Fiscal Pressures
Airport Cost and Revenue External Factors
Airport Costs
Airport Revenue
Conclusion
References

Introduction

Airport privatization has become an increasingly discussed topic throughout the end of the 20th century until the present. Many governments engage in the practice, finding investors and employing one of a variety of models to move away from public ownership. The practice has been particularly prevalent in Europe, with countries such as the United Kingdom being used as prominent examples of the practice’s success. As such, an investigation into the reasons why the idea emerged and spread throughout the world is warranted. Different nations have analysed the results of privatizing airports and found them worth considering or implementing. This essay will argue that airport privatisation can improve efficiency and relieve financial pressure on the government, though there are also some concerns regarding the matter.

Efficiency Improvements

The primary economic argument for the privatisation of airports is that private companies can reduce the costs of operating them and achieve other improvements. The basis for this assertion is the existence of a profit motive for a private firm, which is absent within most public systems. Scholars such as Chen et al. (2017) have found that privately controlled enterprises demonstrate superior technical efficiency to their government-owned counterparts. Moreover, businesses would be quick to respond to shifts in market needs due to the smaller bureaucratic delays their structure enables, such as increases in demand, as Graham and Morrell (2016) suggest. As a result, privatisation has the potential to create an agile and optimised airport industry, traits that can be highly valuable in the quickly-shifting aviation environment.

One essential aspect that differentiates private ownership models from public approaches is competition, which is a significant driver of innovation and overall improvement. Government airports would often be satisfied as long as there were enough flights for the passengers, employing the same policies because they share the same top management. They are also susceptible to the free-rider and moral hazard problems, which would contradict the profit motive and would, therefore, not be as prevalent with private ownership. With that said, it should be noted that private monopolies can have the same effect, and Forsyth et al. (2016) provide arguments both for and against selling airports in groups. One approach damages competition while the other creates the potential for uncoordinated overinvestment without necessarily improving the situation.

There is also a prominent problem surrounding the efficiency improvements created by private airports, one that has manifested recently. Bowyer et al. (2020) highlight how private airports abuse their local monopoly status to pursue profit at the expense of the surrounding community. Littlechild (2018) finds that privatised airports are resistant to changes in these rules and restructuring but also asserts that strict rules, which can change over time, are still necessary for the industry. Partial government ownership is not a viable solution to the issue, as Oum et al. (2008) find that such enterprises perform worse than either fully public or fully private airports in terms of efficiency. However, in the future, the situation may improve as private airport frameworks develop further.

Investment Sources and Fiscal Pressures

In recent decades, governments of developed countries have been under increasing pressure to reduce taxes that are seen as unnecessary. Per Poole (1994), public airports are seen as unnecessary monopolies that often lose money despite their approach of trying to be self-sufficient and can perform better when translated to the private sector. The free-rider problem arises in this context, as government subsidies to public airports to ensure consistent service can result in them having no motive to operate at or above the breakeven point. As a result, they become continuous drains on the nation’s budget, a problem that privatisation can remedy through adjustments aimed to increase profitability. Graham and Morrell (2016) also note that carriers are asking for reductions in airport usage fees, which are unlikely to take place in a public system. As a result, governments in these nations are under pressure to sell or lease their airports to businesses. Many have chosen to do so, leading to a variety of outcomes.

Meanwhile, developing countries are working to construct airports to meet the rising demand of an increasingly wealthy population instead of managing existing ones. However, as Poole (1994) highlights, they often lack the resources to do so and have to attract private investment to fund the effort. Said investment is only possible if the sources of funding retain ownership over the airport after it is complete. As such, nations can overcome the task of expanding their aviation infrastructure by partnering with private capital. Many governments will opt for this approach to improve the rate of the nation’s growth and serve the public better than they may be able to otherwise.

It should be noted that to resolve an airport’s financial issues through private investment, it is first necessary to find people or organisations willing to contribute the required money. Problems may arise in this regard that can affect the airport industry on a scale beyond that of a single facility. Graham (2018) notes how large airports are seen as far more attractive than smaller ones, particularly due to the emergence of low-cost carriers, which favour the latter and often negotiate aggressively for lower prices. A solution, such as extra benefits for orgnaisations that privatise less desirable airports, may be necessary to address these issues, depending on the severity of the problem in practical scenarios.

There are several key reasons for governments to consider airport privatisation, both theoretical and practical. Private airports can often be managed better than their public counterparts due to their profit orientation and competition between different firms. Additionally, private owners and construction investors take financial burdens off of the government, improving its ability to operate. As such, privatisation is happening worldwide, in both wealthy and developing countries, as different nations recognise the benefits. With that said, it is also necessary to consider the drawbacks of privatisation, such as the potential formation of private monopolies. By reviewing the experiences of countries such as the United Kingdom, countries can form a comprehensive framework for the process that maximises benefits and alleviates problems.

Airport Cost and Revenue External Factors

Aviation is an industry profoundly affected by external factors, as its various crises that have resulted from outside disturbances demonstrate. As part of the framework, airports warrant an investigation into the influences that determine their cash flow. They are affected by some of the same factors as airlines, losing money when air travel demand falls through the loss of customers. However, airports also have to contend with some influences that may have a more direct impact on them. In particular, this essay will review the impact of government regulation and airport competition on their costs and the relationship between the economy, passenger numbers and behaviours and their revenue.

Airport Costs

Airport costs are largely fixed due to prominent categories such as employee compensation and infrastructure maintenance and do not necessarily change significantly due to external factors. As Vogel (2019) confirms, they make the business model generally static and focused on expansion due to the high profit implicit in doing so. With that said, competition between airports can lead to innovation that saves costs in an effort to present the lowest-price, highest-quality offer to airlines that may choose to use one airport or the other. On the other hand, in the absence of competition, airports are less concerned with lowering their prices and, therefore, achieving cost savings. However, the influence of this factor is likely not as significant as that of government legislation, detailed below.

The security legislation that was introduced after 9/11 and various other attacks on aviation infrastructure can serve as a prominent example. Tyler (2017) cites an estimate indicating that airports in the U.S. were forced to spend approximately $2.3 billion on installing explosive detection devices after the TSA’s formation, with the FAA awarding them $561 million to compensate for the expense. As such, airports have had to contribute a majority of the costs mandated by the government, which likely had a substantial financial effect on them along with other damages that resulted from the Twin Towers attack.

It should be noted that different nations have varying laws and, therefore, expenses. Nahlik et al. (2016) estimate the environmental damage done by major U.S. airports in 2013 at $1.9 billion. With environmental policies in place, a business may be liable for such harm and have to adjust its operations and introduce potentially costly environmentally friendly measures. However, such laws are not present in every country, as Malaysia demonstrates with its lack of binding ecological laws (Lee, 2019). Janic (2017) highlights how the airport cost structures in the U.S. and the EU are substantially different, with the former having a 20% higher share of capital costs and the latter putting that 20% into labour costs. The difference likely lies in the different laws of the two nations, identifying them as a substantial external factor.

Airport Revenue

Airport revenue is generally separated into two distinct categories: aeronautical and non-aeronautical. The former has traditionally constituted a majority of the airport’s income, as it directly pertains to the facility’s operations. However, as Freestone et al. (2006) note, non-aeronautical revenues have become increasingly important as their costs increase through infrastructure strain and shareholder pressure. Both of these types of income are subject to economic fluctuations, improving when the nation performs well and falling during crises. However, it may also have an indirect effect on non-aeronautical revenues by changing visitor behaviour.

Aeronautical fees are generated when a flight arrives at the airport or departs from it and paid by airlines, which pass on the costs to fliers. Karanki et al. (2020) find that more congested airports charge higher fees, exploiting the advantage they have to improve profits. However, in a situation where demand for flights drops, such as an economic crisis or an event such as 9/11, the inverse situation is likely to happen, with airports reducing their charges to retain business. It is still necessary to store the grounded aircraft, and the Boston Consulting Group (2004) finds that over two-thirds of airlines’ airport-related costs correspond to station and ground handling. These costs translate into revenues for airports as airlines have to pay them to keep their grounded aircraft there with few to no feasible alternative options. As such, while the losses are considerable, airports may be less harmed in this regard than airlines.

However, the reduction in flights would be associated with lower passenger counts, which result in lower non-aeronautical revenues. Retail outlets within the airport generate a large part of this figure. The local and global (for international passengers) economy has to be considered in this aspect, as its performance translates into visitors’ purchasing power and intentions. Wu and Chen (2019) find that flier personality traits, group versus individual presence, and time spent at the airport can all affect their intention to purchase a product. The last statistic is vital because it differs substantially for domestic and international travellers, with the latter spending longer there due to the need to pass customs inspections. Passengers such as LCC fliers or groups, on the other hand, will be reluctant to spend money or time on purchases. As such, international traffic can influence the non-aeronautical revenue of an airport significantly, as can general changes in the number of travellers.

Conclusion

An airport’s revenues and costs are affected by substantially different external factors, which can influence them both positively and negatively. Legislation can force them to spend substantial sums on specific aspects of operations, with only partial compensation. As such, airports that operate in different countries may demonstrate a diverse range of cost structures and expenses for the same services. However, laws affect their costs more than their revenues, which adjust to accommodate the new prices and change based on the state of the economy. Economic improvements or downturns correlate directly with growth or declines in revenue, though the effect may not be as pronounced as it would be for airlines. The economy also directly affects airports’ other revenues, though factors such as international travel also warrant consideration.

References

Bowyer, D., Jones, G., Bowrey, G., & Smark, C. (2020). Survival of the fittest? Challenges to regional aviation and regional communities from the privatisation of Australia’s airports. Australasian Journal of Regional Studies, 26(1), 1-28.

Chen, Y. H., Lai, P. L., & Piboonrungroj, P. (2017). The relationship between airport performance and privatisation policy: A nonparametric metafrontier approach. Journal of Transport Geography, 62, 229-235.

Forsyth, P., Gillen, D., Müller, J., & Niemeier, H.M. (Eds.). (2016). Airport competition: The European experience. Taylor & Francis.

Graham, A. (2018). Managing airports: An international perspective. Taylor & Francis.

Graham, A., & Morrell, P. (2016). Airport finance and investment in the global economy. Taylor & Francis.

Littlechild, S. (2018). Economic regulation of privatised airports: Some lessons from UK experience. Transportation Research Part A: Policy and Practice, 114, 100-114.

Oum, T. H., Yan, J., & Yu, C. (2008). Ownership forms matter for airport efficiency: A stochastic frontier investigation of worldwide airports. Journal of Urban Economics, 64(2), 422-435.

Poole, R. W. (1994). Guidelines for airport privatisation. Web.

Freestone, R., Williams, P., & Bowden, A. (2006). Fly buy cities: Some planning aspects of airport privatisation in Australia. Urban Policy and Research, 24(4), 491-508.

Janic, M. (2017). The sustainability of air transportation: A quantitative analysis and assessment. Taylor & Francis.

Karanki, F., Lim, S. H., & Choi, B. J. (2020). The determinants of aeronautical charges of US airports: A spatial analysis. Journal of Air Transport Management, 86.

Lees, E. (2019). The Oxford handbook of comparative environmental law. Oxford University Press.

Nahlik, M. J., Chester, M. V., Ryerson, M. S., & Fraser, A. M. (2016). Spatial differences and costs of emissions at US airport hubs. Environmental Science & Technology, 50(8), 4149-4158.

The Boston Consulting Group. (2004). Airports – dawn of a new era: Preparing for one of the industry’s biggest shake-ups. Web.

Tyler, S. L. (2017). Airport security: Passenger screening and governance post-9/11. Rosedog Books.

Vogel, H. (2019). Foundations of airport economics and finance. Elsevier Science.

Wu, C. L., & Chen, Y. (2019). Effects of passenger characteristics and terminal layout on airport retail revenue: An agent-based simulation approach. Transportation Planning and Technology, 42(2), 167-186.

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