Freeman

ARTICLE

Privatize the Airports!

Economic Theory and Experience Demonstrate that Public Airports Don't Work

FEBRUARY 01, 1999 by LAWRENCE W. REED

Waiting in long lines for everything from a boarding pass to a cheeseburger. Slow luggage delivery. Expensive parking. Jammed concourses. Surly workers. Small, dingy restrooms. Long walks from one flight to another that leave you worn out, with the only “consolation” being that the connecting flight is delayed anyway.

All that may sound like a scene from a Woody Allen movie set in some banana republic, but to midwestern travelers it rings with familiarity. It’s just another day at Detroit Metro Airport, owned and operated by Wayne County, Michigan.

Thirty-six U.S. airports recently commissioned a survey of 90,000 passengers, who ranked Detroit dead last for overall quality. The poor rating comes despite hundreds of millions of dollars and many commendable efforts by county and airport officials to make Detroit Metro, in the words of director David Katz, “the most friendly place on the planet.” Good intentions and lots of nice new carpeting notwithstanding, the aging airport is simply not keeping up with exploding traffic volume. The planned opening of a long overdue additional terminal in 2001 will help, but realizing Katz’s ambition probably will require something much more dramatic and fundamental.

Twenty years have passed since Congress deregulated the domestic airline industry. With airfares down and traffic volume up considerably, airports like Detroit’s have experienced problems of congestion and a general decline in the quality of services. Though the general public is aware that airlines were deregulated (specifically, their fares and routes), what is much less known and appreciated is that almost all airports remain largely outside the marketplace, hostage to political decisions and budgetary concerns of the government entities that own and manage them. For consumers, the market has worked well in the skies. It’s on the ground, where politicians and their employees rule the roost, that problems often seem frustratingly intractable.

These problems don’t have to exist. A growing number of governments around the world are ending similar troubles, but they’re doing so by making more than cosmetic changes. They are realizing that private for-profit firms have the incentive and the expertise to operate airports better than almost any public, politicized bureaucracy. These governments are privatizing the management and in some cases even the ownership of their airports. The results are impressive: privatized airports are far more innovative, efficient, and responsive to consumers than are public ones.

Twelve years after Great Britain sold seven of its largest airports in 1986—including Heathrow, Gatwick, and Glasgow—the program has proven successful by every measure. An astonishing 2.2 million citizens bought 1.4 billion shares in the newly privatized British Airports Authority (BAA). The flying public has been greeted with an aggressively entrepreneurial attitude aimed at pleasing customers. The airports themselves have undergone substantial physical improvements, and the British treasury has stopped being drained by subsidies.

The British model is spreading. Patrick Cowell, president and CEO of Airport Group International, reports that, “countries from Germany to Australia are now racing to privatize their airports.” Operation and management of most of Canada’s largest airports—including Vancouver—are now in private hands, as is air traffic control. This past November, I landed at Nadi International Airport in the Fiji Islands within days after it too went private, and I survived just fine.

In the United States there have been no outright sales of major commercial airports, but contracting with private companies for many elements of operation and management is taking off. Allegheny County in Pennsylvania contracted with BAA in 1992 to have it design, build, lease, and manage a retail complex for Pittsburgh International Airport. The resulting “AirMall” of commercial businesses—many entering the Pittsburgh market for the first time—has increased per-passenger sales at the airport from $2.40 in 1992 to $8.10 in 1997, generating at least 900 new jobs.

In 1995, the city of Indianapolis turned over the day-to-day management of Indianapolis International Airport entirely to BAA. The company agreed to a performance-based contract in which certain operations and maintenance-cost savings had to be met before it received compensation. That incentive spurred BAA to work hard to cut costs dramatically. At the same time, the addition of 22 new retail stores, 2,300 new parking spaces, and a shuttle bus service boosted non-airline revenue at the airport by 20 percent, with further increases expected. The next logical step—actually selling a major commercial airport to private owners—may occur within the next decade or so.

If Indianapolis and Pittsburgh—indeed, even London and Fiji—can privatize, why can’t Detroit? One reason is the same political inertia that afflicts most government airports. As long as the airport is a patronage machine for the politically well connected, politicians naturally resist any move that diminishes their role.

Another reason that may be particularly acute in Detroit is organized labor. Excessive labor costs because of featherbedding and cumbersome work rules have characterized one Wayne County operation after another. For a privately run Detroit Metro Airport to happen, those practices must give way to more reasonable and hospitable labor-management relationships.

Yet another reason for the lack of privatization is the “Basic Agreement” that exists between Wayne County and the airlines, overwhelmingly dominated by Northwest Airlines. The agreement effectively gives Northwest a veto over the privatization option at Detroit Metro. The airline is worried about landing fees, among other concerns. (Interestingly, landing fees at Indianapolis have remained low and reasonable since BAA took over; the private company understands that gouging major customers is not in its interest.) Wayne County has done what no government should ever do: grant monopoly privileges to one firm when competition was not only possible but would surely have served the public far better.

There is nothing in the stars that ordains airports to be owned and managed by governments. Both economic theory and recent experience demonstrate that. The sooner airports are run by private enterprise, the better.

ASSOCIATED ISSUE

February 1999

ABOUT

LAWRENCE W. REED

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

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