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ECONOMICS Last modified on June 30, 2013

American revolution

With Puerto Rico’s main gateway successfully privatised and an increasing number of airports adopting new business models, are times finally changing in the US for airport ownership? Joe Bates investigates.

To the outsider it might appear as if little has changed in the US in terms of airport ownership – almost all the of nation’s 545 commercial service gateways remaining publicly controlled entities that are owned, operated and developed by cities, counties and states.

The fact that airports are viewed very much as key public assets for their respective cities and regions, and the way the US airport system is funded – with major contributions from the federally controlled Passenger Facility Charge (PFC) and Airport Improvement Program (AIP) grants – means that this is unlikely to change any time soon.

However, if you thought that this adds up to little going on behind the scenes in the US right now, you’d be very wrong as this is arguably the busiest time for deals, potential deals and changes in airport business models since Congress first entertained the idea of change when it launched the Airport Privatization Program nearly 20 years ago.

Private investors interested in getting a piece of the action will no doubt be hoping that the recent privatisation of San Juan–Luis Muñoz Marin International Airport (SJU) in Puerto Rico turns out to be third time lucky for the US, following the failure of the sale of New York–Stewart and collapse of a $2.5 billion deal to privatise Chicago Midway in 2009.

Stewart became the first US commercial airport to be privatised in 2000 when the UK’s National Express Group paid the State of New York $35 million for a 99-year operating lease, but things didn’t work out as planned, and it offloaded the gateway to the Port Authority of New York and New Jersey (PANYNJ) for $78.5 million in 2007.

And, the US’s next attempt at privatisation ended in embarrassment when the winning bidder for Chicago Midway, the Vancouver Airport Services led Midway Investment and Development Corporation (MIDco) consortium, failed to find the funds to complete the deal.

San Juan–Luis Muñoz Marín International Airport

Aerostar Airport Holdings – whose $1.75 billion deal for a 40-year concession to operate Luis Muñoz was ratified by the Department of Transportation (DOT) earlier this year – believes that its deal cannot be compared to anything that has gone before in the US, as it is completely different in terms of location (Puerto Rico, an unincorporated US territory) and financial commitments.

Aerostar – a joint venture between Highstar Capital IV and Mexican airport operator ASUR – has pledged to invest up to $1.4 billion on upgrading the gateway during the term of the lease.

It has pledged to execute a $240 million capital programme in the first three years of the lease, which includes a Capacity Enhancement Program (CEP) for the terminals.  

The CEP includes a new inline baggage handling system for Terminal B/C, a new consolidated security checkpoint, new passenger check-in facilities, and new customer service conveniences such as Wi-Fi, power and charging outlets, and enhanced concession offerings.  

The majority of this work will be completed by the end of 2014 with additional improvements to Concourse C complete by mid-2015.

Andrew Vasey, chief development officer at Aerostar Airport Holdings, told Airport World: “Aerostar sees significant development potential at SJU, which attracted us to the opportunity initially.  

“The emerging economies in Central and South America present significant growth opportunities for Puerto Rico’s business and tourism industry with airlines from this region still in growth mode.

“We will be adding another four gates in the terminal area to the 10 that already have access to the US Customs and Border Patrol services as part of our focus on this growth.  

“There are also many opportunities for growth within the existing footprint of the airport, including the capacity enhancements that Aerostar is making to improve the passenger experience and upgrades to our general aviation and cargo operations.”

Talking about whether Aerostar felt any added pressure to succeed as SJU was the first major US airport to be privatised under the FAA’s pilot programme, Vasey says: “We believe that Aerostar can demonstrate to the US aviation industry that airport public-private partnerships can be as successful as P3 transactions in sectors such as toll roads and public infrastructure.

“As far as kick-starting the P3 process in the US market, we have definitely seen immediate interest from other US airports who are interested in the process, the benefits and the changes that a potential P3 transaction might bring.

“Chicago-Midway is in the process now, so that transaction, if completed, should further contribute to the viability of airport P3 deals in the US market.”

The Puerto Rico government has indicated that it estimates that it will receive over $2.6 billion in revenues and other benefits from the PPP transaction over the term of the lease.

Chicago Midway

The potential privatisation of Midway is still on the agenda after Chicago Mayor Rahm Emanuel’s decision to retain a slot for the Illinois gateway in the FAA’s Airport Privatization Pilot Program.

As a result, a lease of up to 40 years is potentially up for grabs, with six consortiums theoretically battling it out for the prize after satisfying the city’s requirements as qualified bidders.

The six comprise:

  • AMP Capital Investors Limited – an active manager and investor in airports worldwide, its portfolio including Melbourne in Australia and Newcastle in the UK.
  • Corporación América Group – an Argentina-based airport operator with 49 airports in seven countries.
  • Global Infrastructure Partners (GIP) – the controlling investor and active manager of London City, Gatwick and Edinburgh airports in the UK.
  • Great Lakes Airport Alliance – a partnership of Macquarie Infrastructure and Real Assets (MIRA), and Ferrovial, whose airport assets include London Heathrow, Brussels and Copenhagen.
  • A joint venture between global airport operator, Incheon International Airport, and Hastings Funds Management.
  • A joint venture between Industry Funds Management and Manchester Airport Group (MAG), the latter boasting interests in 13 airports across the globe that include Brisbane and Melbourne in Australia and Manchester and East Midlands in the UK.

“I am encouraged by the solid financial and operating experience of the six qualified bidding teams,” says Michael Zalewski, chairman of the City Council Committee on Aviation and a member of the Midway Advisory Panel.

“This review process continues, as does the evaluation of whether a Midway transaction makes sense for Chicago taxpayers, Midway and the City of Chicago, but I am encouraged by what I have seen so far.”

Mayor Emanuel has previously stated that he will only rubber stamp the move if it offers the best deal for Chicagoans.

However, for now, both the Chicago Department of Aviation and the City of Chicago are remaining tight lipped about any possible deal for Midway.

The FAA was slightly more forthcoming, saying that it expects a decision to be made in the third quarter of 2013.

Hendry County Airglades Airport

The only other gateway still in the FAA’s privatisation programme other than Chicago Midway, is Hendry County Airglades Airport, a tiny general aviation facility in Florida.

It is, however, in demand with the FAA currently reviewing a management purchase agreement for it from Airglades International Airport, LLC.

The company – whose stakeholders include USSC Group Inc, Hilliard Street Capital and Florida Cargo Fresh Inc – has been selected on the basis of its promise to transform the airport into a cargo focused facility that will bring economic benefits for the local community.

The big picture

So does the privatisation of Luis Muñoz Marín and potential leasing of Chicago Midway mean that the US is at last ready to embrace the privatisation of its airports?

The FAA’s deputy associate administrator, Catherine ‘Kate’ Lang, for one, remains sceptical about the US’s desire to let the private sector have a greater say in the running of the nation’s airports.

“The privatisation programme has been on the agenda for 17 years, and has consistently failed to attract much interest from US airports, and I don’t exactly see them queuing up to join now, despite the recent developments,” she told Airport World.

“There has been a lot of curiosity about San Juan, but you could argue that why would we want to change an airport system that works well and has provided stability during difficult economic times?”

Lang notes that existing US economic and regulatory legislation ensure that when it comes to airport rates and charges, the FAA imposes a very broad statutory framework, whose governing principles are based on being “fair and reasonable”, “non-discriminatory” and “economically self-sustaining”.

She also believes that light handed regulation of the system, the fact that many functions are already in the private sector, and access to inexpensive capital, act as disincentives to airport privatisation in the US.

The current system does, however, forbid airports from pocketing their ‘profits’ and spending them elsewhere as all net revenues must be spent on-airport, which is very different to the privatised model.  

She adds: “There are, of course, limitations to the US model, and while I think it works remarkably well, the proof is in the pudding when you look at the density and development of the system.”

Lang, who jokes that the US is a bit of a “late bloomer” when it comes to airport privatisation, also concedes that the nation’s airport system would be a very difficult one to change.

And, untypically for an American, she refuses to promote one business model over another (public vs private, dual till vs single till or hybrid), prophetically stating that “the best business model is the one that works best for you, as long as it’s not illegal, anti-competitive or discriminatory”.

She also notes that all business models only remain good if they continue to evolve and grow.

Wise words indeed, because although the US airport system may not have fully embraced privatisation, it is evolving, and now boasts one privately built and operated commercial gateway (Branson, Missouri) and a growing number of quasi-government run airport operators which include the newly created Connecticut Airport Authority.

 

Branson Airport

Missouri’s Branson Airport is different to any other airport in the US as it is the nation’s only privately funded, developed and operated commercial gateway.

To all intents and purposes it is also privately owned, but operator Branson Airport LLC’s decision to give it to Taney County after building it – in exchange for a 50-year lease – theoretically makes it publicly owned.

It took the dramatic step to give it access to tax exempt debt that would help finance its construction.

The $160 million airport was the brainchild of businessmen Glenn Patch and Aviation Facilities Co (AFCO) – later joined by former bond trader, Steve Peet, and a group of investors that included a unit of Citigroup – who decided to build it after voters twice rejected the opportunity to back and fund its development.

And when it opened for traffic on May 11, 2009, with a single 7,200ft runway, 58,000sqft terminal – described by some as about a third of the size of a suburban supermarket – Peet stayed on as its CEO to oversee its successful addition to the US’s airport system.

If truth be told, it wasn’t an overnight success, and had to form its own low-cost airline (Branson Express) to stimulate traffic growth, but, it did the trick as Frontier Airlines followed, and in March this year, Southwest launched daily flights to Chicago, Houston and Dallas/Fort Worth as well as a weekly service to Orlando.

Executive director, Jeff Bourk, says: “Getting Southwest is a major coup for Branson and justifies our belief that there was the potential for a new low-fare airport that makes visiting the area quicker, cheaper and easier for vacationers.”

The addition of Southwest means that around 335,000 passengers are expected to use the airport this year – a far cry from the 80,000 that passed through Branson in 2009, and well above the 225,000 to 250,000 figure Peet revealed that he hoped to see in its first three years.

Indeed, such is the confidence that the airport has in its growth potential that Bourk even talks about the possibility of handling up to 2mppa by 2020.

Impossible? Well, think again, as Branson is no backwater. Its Ozark mountains location, status as the third-largest outlet-shopping venue in the US and reputation as an entertainment capital – the city boasts over 50 theatres between them showing 100 daily shows – already attract over eight million visitors yearly.

And, Bourk believes that Branson Airport can only become more popular in the future as the word spreads and passengers realise that they no longer face the prospect of paying “sky high” fares to fly to nearby Springfield Airport, which is also 52 miles and a one-hour long drive away.

In addition to its 750,000 passenger capacity terminal and single runway, the airport boasts and operates its own fuel farm, FBO facility, general aviation facility, rental car complex and parking lots on its
922 acre site.

So what are the advantages and disadvantages of going it alone? Bourk says: “We don’t have the restrictions of the federal grant assurances. In other words, we are not so regulated and told what we can and cannot do by the government. This means that we can negotiate our deals directly with the airlines and tenants on business merits alone.”

As an example of more freedom afforded by its business model, Bourk says that Branson can encourage airlines to launch services by granting them ‘initial development rights’, which mean that no other carrier is allowed to operate on the same route.

He adds that being independent also ensures that there is a lot less red tape to contend with, and points out that if the airport was profitable, its shareholders would be able to keep the money.

Bourk lists the disadvantages as not being eligible for any federal grants such as Passenger Facility Charge (PFC) and Airport Improvement Program revenue, which, for Branson, would amount to over $1 million per annum.

“We are not profitable yet, but we have only been open for four years and have a lot of debt to pay off,” comments Bourk.

“However, enplanements are growing each year and Southwest coming here will significantly boost our numbers and mean that other airlines will have to seriously consider this market in the coming years.

“We don’t need to grow massively, but is it unreasonable to think that we could grow to half a million or even one or two million passengers yearly?

“If you look at other airports our size that have had air services for much longer, such as Myrtle Beach and Reno, they are handling one million and 2.5 million enplanements respectively, so two million people here is definitely achievable. We have a lot of room to grow.”

Connecticut Airport Authority

Arguably the US’s latest quasi-government airport organisation, the newly formed Connecticut Airport Authority (CAA) was set up to develop, improve and operate Bradley International Airport and the state’s five general aviation airports of Danielson, Groton/New London, Hartford Brainard, Waterbury-Oxford, and Windham.

Its goal is simple – to make Connecticut’s airports more attractive to airlines and bring in new routes and businesses, which support Connecticut’s overall economic development and growth strategy.

And, in line with its new, more entrepreneurial philosophy, its 11 member board is primarily made up of people from the private sector with more commercial backgrounds.

They include chair, Mary Ellen Jones (Pratt & Whitney) and former ACI World director general, Robert Aaronson, as well as three state officials.

CAA chair, Mary Ellen Jones, said: “The big difference between now and when we were part of the State of Connecticut’s Department of Transportation (DOT) is that we are a bit more agile and entrepreneurial in terms of operating our airport system.

“We had very strong support from the Governor of Connecticut, from the legislator and the business community to do something different. The model we use now was actually copied from other US airports and brought into effect in the middle of 2011, although the official transfer to the CAA won’t happen until this summer.

“Like any new organisation, we are looking to bring in new blood. We are bringing in new talent with more commercial experience to help us develop and grow the business. However, we also need people who know the airport and state, so I think the fact that the bulk of our staff have transferred over from the Department of Transportation gives us a good mix of talent.

“We want to enhance the airport experience for our customers by introducing new concessions, more comfortable facilities and, of course, new airline services and cargo operations. We are now more focused on customer satisfaction than ever before.”

And, it appears to be working, as American Airlines recently announced that the August 2013 launch of a new trans-continental service to Los Angeles and JetBlue has said that it will boost its operations out of Bradley with new flights to Fort Myers and Tampa.

Jones now wants a transatlantic service, and although that might prove difficult to achieve, it wouldn’t be a first as Bradley did briefly have a Northwest Airlines B757 flight to Amsterdam in 2007/8 before the global recession put paid to it.

Bradley also harbours ambitious plans to upgrade its airfield and road system and eventually build a new Terminal B to cope with rising demand, which currently stands at around 4.5mppa.

According to the most recent economic impact analysis, Bradley International Airport contributes $4 billion in economic activity to the state of Connecticut and the surrounding region, representing $1.2 billion in wages and 18,000 full-time jobs.

Other quasi-government operators in the US, according to Jones, include The Rhode Island Airport Corporation and the Port Authority of New York and New Jersey (PANYNJ) and the Massachusetts Port Authority (Massport).

 

Gary/Chicago International Airport

Another airport looking to the private sector is Gary/Chicago (Indiana), which recently hired a consulting firm spearheaded by former Indianapolis and Jacksonville boss, John Clark III, as an advisor to help it secure a private investor to help develop the airport site.

According to The Times of Munster, the contract calls for a success-based fee for Clark’s consulting firm of greater of than $200,000 or 0.5% of any public-private partnership deal struck.

The airport authority is looking to find a private investor willing to pump at least $100 million into the airport.

LA/Ontario International Airport

The future of LA/Ontario International Airport (ONT) remains unclear after talks about the gateway’s possible sale/lease to the City of Ontario were put on hold when it filed a claim against owner, Los Angeles World Airports (LAWA).

The threat of litigation means that it is impossible for LAWA to discuss specifics.

A spokesman was, however, able to issue a response to a question about the value to LAWA of leasing/selling ONT.

They said: “The Los Angeles Board of Airport Commissioners does not perceive any value in selling or leasing the airport, but LAWA has been co-operative in the negotiations process.”

She also confirmed that the May 7 announcement that Ontario International Airport Terminal & Equipment Company, LLC (ONT-TEC) had signed a deal for the lease of terminal space and the maintenance and operation of terminal equipment at LA/Ontario would have no bearing on whether LAWA chooses to sell or lease ONT.

Last year, LAWA rejected Ontario’s rock bottom bid of $50 million to take over the airport.

Its offer followed LAWA’s 2011 call for Expressions of Interest (EOI) from parties interested in leasing the airport, although nothing came of it despite interest from 10 consortiums and global airport operators such as Fraport, GMR, Munich and Incheon.

Airport World understands that the EOI is no longer in effect and LAWA is unlikely to go down this route again.

LA/Ontario, like many US airports, has experienced a downturn in fortunes in recent years, with traffic plummeting from its 2007 peak of 7.2 million passengers to 4.2 million last year. And, the latest projections indicate that the figure could fall to below 4mppa in 2013.

The decline in traffic has led to claims from the City of Ontario that ONT has been “mismanaged” over the years, a claim LAWA strongly denies, pointing out that it has invested more than $560 million on capital improvements at LA/Ontario.

Watch this space for further developments.

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