Airport Privatization: Limited Interest despite FAA's Pilot Program
Published: 2014-11-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Nearly all the 3,330 airports in the national airport system in the United States are publicly-owned and operated. However, some argue that the private sector could better fund and operate airports than public owners. GAO reported in 1996 that many barriers to full privatization existed in the United States. In 1996, Congress created the APPP which reduced some of the barriers to privatization. However, over the program's 18 years only two airports have privatized and one of them has reverted to public control.
To better understand airport privatization, GAO was asked and mandated to review several aspects of privatization. Specifically, this report describes (1) the experience with the APPP; (2) challenges airport owners and investors face to full airport privatization; (3) the potential effects of airport privatization; and, (4) reasons why airport privatization is more prevalent outside of the U.S. and stakeholder views on the APPP.
GAO reviewed airport application and docket information and interviewed applicants. GAO also interviewed 42 airport stakeholders including airports, airlines, airport consultants, labor groups, and private airport operators and financiers to gain their views on airport privatization in the U.S. and other countries. This non-generalizable group was mainly selected from our review of APPP docket documents and our prior work on airports.
DOT reviewed a draft of this report and provided technical comments which were incorporated as appropriate.
section_title: What GAO Found
paragraphs: Since the FAA started to accept applications to the Airport Privatization Pilot Program (APPP) in 1997, 10 airports have applied to the pilot program (see figure). Of these 10, 2 were privatized, 7 did not complete the program, and one application is currently under FAA review. Public-sector airport owners' objectives for full privatization varied, but the overriding reason cited was financial benefit. The 7 applicants that withdrew did so for varied reasons, such as changes in market conditions that reduced expected privatization benefits.
Several factors reduce both public and private sector interest in airport privatization in the U.S.—such as higher financing costs for privatized airports and the possible lack of state and local property tax exemptions. Also, while the APPP reduces some of the challenges to privatization that we identified in 1996, privatization still requires considerable time and cost to navigate. Furthermore, public sector airport owners have found ways to gain some of the potential benefits of privatization without ceding control under full privatization, such as entering airport management contracts and joint development agreements for managing and building an airport terminal.
The potential effects of airport privatization on airport efficiency, the federal aviation trust fund, federal tax revenues, and airport employees and concessionaires are difficult to determine. Privatization's impact on these areas depends on many different factors such as how each airport privatization is structured, making it difficult to estimate the overall impact.
Different airport ownership and financing structures and motivations have driven more extensive overseas privatization efforts, as at least 450 airports around the world have been privatized to some degree. Stakeholders mentioned a variety of lessons learned from the U.S. and international experience, including ensuring public-sector due diligence, involving all stakeholders and creating a transparent privatization process. Stakeholders also provided a range of suggestions for modifying the APPP, from increasing the clarity of the program's rules to reducing the federal role in airport privatizations.

section_title: Letter
paragraphs: Most public-use airports in the United States have been publicly-owned,  operated, and financed since commercial aviation service started in the  1920s. Domestic interest in privatization has been sparked by (1)  airport’s estimated capital costs, projected to be an average of $13.1  billion per year between 2013 and 2017; (2) the privatization of hundreds  of airports around the world; and (3) the belief that private owners could  operate airports more efficiently than public owners. Others argue that  airports already have extensive private sector participation through food  and rental-car concessions or management contracts for whole airports.  They also argue that the federal government has invested heavily in  airports—about $57.6 billion in grants from federal airline ticket taxes  through the Airport Improvement Program (AIP) from 1993 through 2013  alone—investments which could potentially be turned over to the private  sector without adequate compensation under privatization. We reported in  1996 that there were many legal and financial barriers to privatizing  airports in the United States. In 1996, Congress created the Airport  Privatization Pilot Program (APPP) to alleviate some of these barriers and  test the potential for greater privatization. However, over the last 18  years since the APPP’s inception, two airports were privatized under the  pilot, and one of them has reverted to public sector control.
To better understand airport privatization, particularly with respect to the  APPP, you asked us and we were mandated to review several different  aspects of privatization. Specifically, this report describes (1) the  experience with the APPP since its inception; (2) challenges airport  owners and investors face when seeking to privatize U.S. airports; (3) the  potential effects of airport privatization; and, (4) reasons why airport  privatization is more prevalent outside of the United States and  stakeholder views on whether and how to revise the APPP.
To address these objectives, we analyzed the Federal Aviation  Administration’s (FAA) APPP documentation and public docket  documents from 1997 to 2014 relating to each airport’s application to the  APPP. We conducted site visits to Chicago, Illinois and San Juan, Puerto  Rico to interview FAA and local stakeholders about Chicago’s Midway  International Airport (Midway) and San Juan’s Luis Munoz Marin  International Airport (Luis Munoz Marin) APPP applications and  processes and the potential and actual impacts of airport privatization.  We selected these sites because they were the two of the largest airports  in the APPP and because Midway went through a significant amount of  the process but remained in public sector operation while Luis Munoz  Marin went through the APPP process and did privatize. We reviewed  industry and think-tank reports and interviewed 42 airport privatization  stakeholders to obtain their views on the challenges of airport  privatization in the U.S., the prevalence of airport privatization in other  countries, and the potential impacts of airport privatization. These  stakeholders included: FAA headquarters and regional officials; local  public-sector airport owners; airlines; private-sector airport operators,  consultants and investors; bond-rating agencies; airport labor groups;  airport concessionaires, academic and other experts, and local public  interest groups. We selected these stakeholders from our prior work on  airports, from our review of APPP docket documents and their work on  both U.S. and foreign airport privatizations. The results of our interviews  with these stakeholders are not generalizable. For more details on our  objectives, scope and methodology, see appendix I.
We conducted this performance audit from January 2014 to November  2014 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Nearly all of the 3,330 commercial service or general aviation airports  designated as part of the national airport system are under city, state,  county or public-authority ownership. Airport ownership in the United  States has evolved under a public model since the 1920s as a way to  promote the development of the U.S. aviation industry. The Surplus  Property Act of 1944 transferred excess military bases and property to  state and local governments for use as public airports and was a  contributing factor to the development of airports as a public asset.
Privatization generally refers to shifting governmental functions and  responsibilities to the private sector. FAA more specifically has defined  airport privatization as transferring airport operations from the public  sector to the private sector through a formalized transfer of federal grant  obligations and the granting of a Part 139 operating certificate to the new  airport operator. However, private sector involvement in airports can and  does take many forms not necessarily requiring the transfer of ownership  control of the airport. A 2012 Airport Cooperative Research Program  (ACRP) report on airport privatization, for example, identifies the general  forms of airport privatization, ranging from the least amount of private  sector activity (service contracts) to full privatization (sale or lease of  airport in its entirety) as outlined in figure 1 below.
At one end of the privatization continuum, nearly all domestic airports rely  on services contracts for janitorial services, parking operations, or  terminal concessions, which are leases with private vendors acting as  tenants. Next in the continuum are management contracts for airport  operations, where airport owners contract out management of either  specific operations (like the management and operation of parking  facilities or terminal operations) or contract out the entire airport to a  private sector entity. As an example of the latter, AvPorts Management  LLC, a private sector airport operating company, manages Albany  International Airport and is responsible for airport management,  operations, maintenance, airport rescue and fire, parking lot operations,  shuttle bus operations, and operation and management of aircraft deicing  collection and treatment systems. Next are private developers, financers,  and operators, who provide capital investment for airport development. In  this scenario, private investors finance the development of a terminal or  facility and may be responsible for its operations and maintenance in  return for a share of the revenues. One example is at Terminal 4 of the  Port Authority of New York and New Jersey’s (PANYNJ) John F. Kennedy  International Airport where the private sector developed and manages the  terminal, but PANYNJ maintains overall operations of the airport. At the  most privatized end of the continuum is the sale or long-term lease of the  entire airport asset to a private sector operator. Of the 501 commercial  service airports in the United States, private sector operators hold Part  139 airport operating certificates for only 2—Luis Munoz Marin, which is  under a 40-year lease, and Branson Airport in Missouri, which was  privately developed. Currently, a private-sector airport operator holds  the FAA Part 139 airport operating certificate for only 1 of the 3,330  airports that the FAA has designated for inclusion in the NPIAS, at Luis  Munoz Marin.
AIP grants, U.S.C. § 47104; PFC charges 49 U.S.C. § 40117. annually. All airports in the NPIAS are eligible to receive  apportionment grants, which are determined on an annual basis for  primary airports by a formula based on the number of passengers and  amount of cargo carried. For non-primary airports, the funding formula  is based on the development needs at those airports as identified in  the NPIAS, with a minimum apportionment grant of $150,000. These  airports may also compete for AIP discretionary grants, which fund  national priorities and objectives that enhance capacity, safety, or  environmental concerns. Grants require a local match of 5 to 30  percent depending on airport size or type of project.
PFC charges: The PFC program authorizes participating airports to  collect up to $4.50 per boarded passenger, per flight segment.  Airports apply for participation in the program, and if approved, funds  collected by airlines through fees placed on passenger tickets are  remitted to airports to use for FAA-approved development projects  that preserve or enhance airports’ safety, security, or capacity; reduce  noise; or enhance airline competition. Additionally, PFCs can also  be used to pay interest costs on debt issued for FAA-approved airport  development projects. According to FAA, 388 commercial service  airports were approved to collect PFCs as of April 2014.PFC collections totaled about $2.8 billion in calendar year 2013, with   Annual  the most collections going to large and medium hub airports,  proportionate to their number of passenger boardings.
Locally generated revenues: Aeronautical revenue is generated from  airlines and general aviation users of the airfield or terminal and  includes charges for aircraft-landing fees and terminal rentals. While  the FAA ensures that airport rates and charges to airlines are  reasonable, as required by federal law, through its grant agreements  with airport owners, it does not set those rates. Non-aeronautical  revenue includes rents the public owner collects from restaurant and  retail concessionaires, rental car concessions, and parking-garage  fees. These revenue streams are used as repayment of bond debt  issued to finance various airport capital-improvement projects  including both new and rehabilitated facilities. We have reported that  on average about 55 percent of airport revenues come from  aeronautical charges and 45 percent come from non-aeronautical  charges.
Our last report on airport privatization in 1996 found that the full  privatization of airports in the United States was unlikely due to a myriad  of legal and financial barriers. Most significantly, airports that received  AIP grants were subject to grant obligations that preclude any airport  revenue for non-airport purposes by the public-sector airport owner   As a result, if such an airport were to be fully  (revenue diversion). privatized, then the public-sector owner could not use any of the proceeds  from the lease or sale of the airport for any purpose other than reinvesting  in the airport (or any other airport owned by the public sector entity); nor  could the private sector operator or owner retain profits earned from the  privatized airport.  Another barrier we identified was private airport  owners’ ineligibility to collect PFC’s or receive AIP grants.the public-sector owner of an airport that was privatized could have been   In addition,  required to repay federal grants or return surplus federal property at that  airport. Finally, unlike public airports, privatized airports would not be able  to obtain access to tax exempt debt.
The Federal Aviation Reauthorization Act of 1996, Pub. L. No. 104-264, § 149, 110 Stat.  3213, 3224(1996). APPP, codified at 49 U.S.C. § 47134. at least one participant had to be a general aviation airport. The FAA  Modernization and Reform Act of 2012 increased the number of potential  participants to 10.
Under the APPP, the current public-sector airport owner is responsible for  overseeing the privatization process by satisfying all legal requirements  and selecting the private bidder. To initiate the APPP process, public- sector airport owners can submit to FAA for approval either a preliminary  application without a private operator selected or a final application that  identifies a selected private operator. FAA is to review the application,  provide comments, and if approved, award the public owner a slot in the  privatization program. If the public-sector airport owner submitted a  preliminary application, a confirmed slot in the program means the  applicant can select a private operator, negotiate lease terms, and submit  a final application for FAA approval. Once the final application is  accepted, FAA is to provide notice for a 60-day public comment period,  hold a public meeting towards the end of this period, and respond to  comments received. This process is outlined in figure 2 below.
section_title: The Airport Privatization Pilot Program Has Resulted in Few Privatizations
subsections: section_title: Airports That Participated in APPP Sought Financial or Economic Benefits
paragraphs: Since the FAA started accepting applications in 1997, 10 airports (5  commercial service and 5 general aviation or general aviation reliever  airports) have applied to the pilot program. Those 10 airports are  identified in figure 3. Public-sector airport owners’ objectives for full  privatization varied; however, the overriding reason for privatization for  nearly all applicants was to gain some financial benefit. Nine of 10  applicants indicated that obtaining either a financial return from leasing or  selling the airport or economic development benefits for the local  community were objectives for transfer of airport control under the APPP.  These financial returns could include an up-front lease payment or on- going payments from the private-sector airport operator over the life of the  lease, or a combination of both types of payments.
Larger commercial service airport sponsors sought full privatization  through the APPP to use lease proceeds for non-airport purposes and to  improve operations. The City of Chicago, for example, sought to obtain  proceeds from a long-term lease of Midway to help meet the city’s $9  billion unfunded pension liability. After securing state legislation to extend  the airport’s exemption from property taxes to a potential private-sector  airport operator, among other things, the City committed to using the net  proceeds from privatization for airport infrastructure projects or to fund  city pensions. According to the Puerto Rico Ports Authority (PRPA), the  public-sector owner of Luis Munoz Marin (as well as the operator of  several other aviation facilities and the owner or operator of several non- aviation facilities), PRPA needed immediate debt relief, improved airport  operations, and substantial infrastructure improvements for the airport.  Notably, when the PRPA applied to privatize Luis Munoz Marin in 2009,  the Authority carried more than $800 million of debt and wanted to apply  the proceeds from the long-term lease of the airport towards reducing that  debt. The governor of New York at the time of Stewart International  Airport’s (Stewart) privatization identified the goals of privatization as  providing the Hudson Valley region with better air service, increased  economic development, and a strengthened tax base as main objectives  for full privatization. The governor wanted to use the expertise of the  private sector to develop the underutilized airport and surrounding real  estate, which it hoped would result in more jobs and economic  development for the region.
Under the APPP, commercial service airports can only be leased. The  financial structure of these privatizations included an upfront payment  followed by a stream of payments over the lease term. The private sector  bidders have proposed to finance their purchases through a mix of debt  and equity. For example, in the case of Luis Munoz Marin, Aerostar, the  private-sector airport operator that won the lease of the airport, financed  $350 million of the $615 million up-front payment by issuing bonds with a  maturity of 22 years and yield of 5.75 percent. The investment was  supplemented with $265 million in equity financing. One private-sector  airport operator that we spoke with stated that the expected return on  invested equity that private equity owners generally demand ranges  between 10 and 20 percent, which is a higher return on equity than debt  because it is unsecured and returns are more uncertain. Table 1 outlines  the purchase and financing structure that include up-front equity and debt  issuance for the three applicants that submitted final APPP applications to  the FAA including the two completed privatizations (Stewart and Luis  Munoz Marin), and the first privatization attempt for Midway. For the lease  of Stewart, the bidder, National Express Group (NEG) relied on NEG  equity funds and revolving credit for its $35 million up-front lease payment  in 2000. In the final application for Midway’s first effort, Midway  Investment and Development Company (MidCo) stated that at least 20  percent of the initial upfront payment would come from equity with the rest  made up from loans and additional equity. MidCo’s financial plan for the  first Midway privatization effort depended on an estimated over $1.12  billion (in nominal dollars) increase in PFC collection authority to cover  the additional costs of refinancing MidCo’s outstanding debt, which would  have been about a 45 percent increase over Midway’s approved  estimated amount of $2.5 billion in PFC collection authority for the same  number of planned capital projects. To close the lease for Luis Munoz  Marin, FAA required the PRPA to confirm the investor’s ability to finance  the initial lease amount and perform over the lease term. FAA officials  stated that they ensured that the new private operator could secure its  financing.
In contrast to large commercial service airports, smaller general aviation  airports applied to the APPP as a means to attract capital improvements  to expand airport operations and to increase or attract commercial  service. For example, Niagara Frontier Transportation Authority’s  objectives for Niagara Falls International Airport were to develop the  airport’s seasonal charter service and foster regional service to major  airport hubs. The Gwinnett County Board of Commissioners (Gwinnett  County Airport—Briscoe Field) and the Board of Commissioners for the  Orleans Levee District (New Orleans Lakefront Airport) both sought  proceeds for the redevelopment of airport infrastructure to create more  options for commercial passenger service or increase the quality and  value of services for airport users in their respective locations, while  Airglades Airport in Hendry County, Florida, is seeking to make  improvements to initiate air cargo service at the airport.
section_title: Two Airports Have Been Privatized under the APPP; One Application Is Active, and Seven Airports Left the Program for Various Reasons
paragraphs: Since the FAA started accepting applications for the APPP in 1997, two  airports have been privatized under the APPP: Stewart and Luis Munoz  Marin (see fig. 4). These privatizations took from about 2.5 to more than 3  years from the initial application to completion. Stewart was privatized in  2000 with a 99-year lease agreement but reverted back to public control  in 2007, leaving Luis Munoz Marin as the only remaining privatized airport  under the APPP. Additionally, there is one active application currently in   In August of  the APPP for Airglades Airport in Hendry County, Florida. 2014, FAA approved a management contract between Hendry County  and Airglades International Airport LLC pending Hendry County’s  submission of the final APPP application.
FAA is currently reviewing the environmental assessment that was submitted as part of  the proposed privatization of this airport. The assessment is focused on the proposed new  10,000-foot runway that the private sector airport operator wants to build to ensure that  the proposed airport expansion and transfer to the private operator would not adversely  affect the surrounding environment. Federal law requires FAA to review proposed  changes to airport layout plans (as well as AIP and PFC funding decisions among other  federal actions) to ensure they are in accordance with the National Environmental Policy  Act, which requires federal agencies to analyze and publicly disclose the purpose and  need for a project, feasible alternatives, nature and extent of a project’s environmental  effects and proposed mitigation measures.
section_title: Privatization outside the APPP Is Also Rare
paragraphs: Private ownership or operation of domestic commercial service airports  outside of the APPP is also rare. Only one commercial service airport in  the United States was privately developed and is privately operated— Branson Airport in Branson, Missouri. Branson Airport’s operator,  Branson Airport LLC, chose not to participate in the APPP and developed  the airport with financing from $60 million in private investment and $114  million in tax-exempt bonds. The Branson Regional Airport Transportation Development District issued the tax-exempt bonds as  Private Activity Bonds. Building this new airport took 22 months, with  construction beginning in 2007. Although privately developed and  operated, Branson Airport LLC holds a long-term lease agreement with  Taney County, MO, for the airport land and the airport collects $8.24 from  the City of Branson for every passenger that flies into Branson Airport, to  support tourism in Branson and the surrounding area. Branson Airport  LLC chose not to participate in the AIP program because taking AIP  grants would subject them to grant obligations—among them economic  nondiscrimination requirements. Without these obligations, Branson  Airport LLC has the flexibility to optimize returns and can negotiate  different landing charges with different airlines that serve the airport.   However, passengers that fly to or from Branson Airport still pay federal  ticket taxes into the Airport and Airway Trust Fund which funds AIP  grants, even though Branson Airport LLC has not chosen to receive any  AIP grants. Branson Airport, like any airport, is also susceptible to shifts in  passenger traffic. While a Branson Airport LLC representative stated that  the airport has had 1.1 million passengers in its first 5 years of operation,  in recent years, passenger traffic at Branson has declined and Branson  Airport LLC has entered into a forbearance and funding agreement with  the bondholders’ trustee.
section_title: FAA Assists in the Application Process but Does Not Promote Airport Sponsor’s Participation in the APPP
paragraphs: FAA administers the APPP program but does not actively seek  applicants. FAA reviews applications, provides guidance and technical  assistance, facilitates communications among stakeholders throughout  the application process, and, according to FAA, routinely makes  information about the program available through its public website and  presentations. Technical assistance focuses on guidance for completing  an application that adheres to the provisions set forth by FAA. FAA staff  have also provided technical assistance to applicants in submitting an  accurate map of all airport properties that would be transferred to the  private-sector airport operator. FAA staff also review airport lease  agreements between the public sponsor and private operator to ensure  that the proposed lease complies with federal laws and regulations. FAA  headquarters and regional staff stated that after providing applicants with  written acceptance of their preliminary application, staff educated bidders  and public-sector airport owners about the APPP process and provided  technical assistance.
Under authority delegated by the Secretary, included in administration of  the pilot program, the FAA Administrator is also responsible for approving  certain exemptions to waive grant repayment and to allow revenue  diversion from the sale or lease of the airport. Based on review of the  sponsor’s application and proposal, the FAA Administrator decides which  exemptions, if any, should be granted based on an established list of  considerations. For example, at Luis Munoz Marin, the FAA  Administrator waived about $49 million in grant repayment for the PRPA  because Luis Munoz Marin would continue to function as a public airport  and all AIP-funded facilities and improvements would continue to be used  for the purposes of the original AIP grant. The FAA Administrator  granted approval of the PRPA’s use of lease proceeds for general  purposes since the request had been approved by more than 65 percent  of air carriers and since funds used for debt reduction would allow PRPA  to make future investments in both ports and regional airports. Similarly,  about $59 million in grant repayment was waived for Stewart because the  airport would continue to function as a public airport and AIP grant-funded  facilities would maintain use for the purposes of the original grant. For  Midway, FAA officials estimated that about $145 million would have been  waived if the privatization had been finalized and a full waiver of grant  repayment had been made.
section_title: Several Factors Limit Demand for Privatization, yet the Potential Benefits of Private Investment and Expertise Can Be Achieved without Relinquishing Airport Control
subsections: section_title: Financial Considerations Can Reduce Demand for Privatizing U.S. Airports despite APPP
paragraphs: Financial considerations reduce both public and private sector demand  for privatizing airports in the U.S. as demonstrated by only two airports  successfully completing the privatization process under the APPP since  1997.operator must be able to make a profit and the public-sector airport owner  must believe that more will be gained than lost in the transaction. The first  key consideration to private-sector airport operators and investors is their  generally higher borrowing costs than the public-sector airport owner due  to the private sector’s inability to issue tax-exempt bonds. For example,  an airport privatization expert we spoke with stated that one obstacle   Fundamentally, for an airport privatization to occur, the private  barring more airport privatization is the private-sector airport operator’s  lack of access to tax-exempt bond financing increasing the borrowing  costs when compared to public-sector airport owners. In addition,  representatives from a financial institution we spoke with said that public- sector airport owners have the access they need to finance their capital  investments with tax-exempt bonds. Even though there has recently been  a narrowing in the differential in interest rates between tax-exempt and  taxable bonds, prospective private sector airport owners may still find it  difficult to gain sufficient operational efficiencies upon privatization to  overcome the higher costs of financing they face compared to public- sector airport owners.  A recent report by the House of Representatives,  Committee on Transportation and Infrastructure’s Special Panel on  Public-Private Partnerships found that one major reason why the U.S.  public-private partnership market has not grown as quickly as in other  countries is that those countries do not offer tax-exempt municipal bonds.  The Panel found that the U.S. posses a robust municipal bond market of  approximately $3.7 trillion, of which a significant portion is for  infrastructure financing, is one major reason why the potential for public- private partnerships in the United States is limited.  The Panel also found  that given the private sector’s higher cost of capital, airport public-private  partnerships will only work in certain circumstances, usually involving  budget constraints or airports that have historically not been well  managed. Current Internal Revenue Service (IRS) regulations  significantly limit the ability to transfer outstanding tax-exempt debt to the  private sector operator. As a result, the airport’s outstanding tax-exempt  debt must be paid off by the public-sector airport owner prior to a private  sector transfer, leaving the private-sector airport operator to finance the  acquisition and any future capital improvements with generally higher- cost taxable bonds and equity investments. The 2012 ACRP report on  airport privatization also noted that the tax-favored status of U.S. public  municipalities is a significant deterrent to full privatization.
Privatized airports (within and outside the APPP) also may not be entitled  to local and state property tax exemptions, unless specifically authorized,  and would likely not be exempt from tort liability claims. In the Midway  airport example, City officials had to negotiate with state lawmakers to  maintain Midway’s property tax-exempt status and the state enabling  legislation required the city to dedicate 90% of lease proceeds to fund  capital infrastructure and maintenance or to fund municipal employee  pension funds. According to the recent ACRP report on airport  privatizations, with reduced protections for tort liability claims, privatization  (within and outside the APPP) may create greater tort liability risk for a  private operator than a public operator in the event of, for example, an  aircraft accident, since the private operator would not likely be entitled to  same immunities as a public entity.
While increased financing and other costs have not eliminated private  sector interest in airport privatization in the United States, those factors,  when combined with others discussed below, have reduced the range of  airports that may be interested in privatization. These factors may also  help explain the lack of interest by public-sector airport owners in  pursuing full privatization under the APPP. Further, until the Luis Munoz  Marin privatization, there has not been an example of privatization in the  United States for the completion of the full privatization process. Two  industry experts we spoke with said that if the privatization of Midway  airport had been successful, it could have increased the visibility of airport  privatization in the US and demonstrated the benefits of private sector  involvement. A successful privatization would also have to overcome any  negative perceptions and mistrust from some in the public and local  communities about private sector ownership of a public-use facility.
section_title: APPP Application Process Can Be Time Consuming and Costly
paragraphs: Applicants to the APPP and other key stakeholders involved in the  process said that the application process presented several challenges  that added to the risks, and thus costs, of pursuing privatization.  According to public airport owners, airport stakeholders, private sector  investors, and the FAA, a successful transfer of airport control required  the public owner and its team of consultants, and advanced-stage private  sector bidders to address several challenges including obtaining airline  consent, ensuring due diligence in following the FAA’s application  procedures, and mitigating external risk factors such as navigating public  opinion and political scrutiny. This process, whether or not the application  ultimately resulted in privatization of the airport, took significant time,  ranging from 14 to 84 months (see fig. 5 below). FAA officials said that  some airports might initially seek to structure deals to use the proceeds  from privatization for non-airport purposes, which the FAA reviews to  determine if the overall benefits of the deal are such that a waiver of the  use of the proceeds for non-airport purposes is warranted.  Therefore,  FAA officials noted that the privatization process can be lengthy because  FAA has been exercising due diligence to ensure all APPP rules are  followed and because commercial entities take a long time to structure  their deals.
We spoke with key public sponsor representatives of two of the three  APPP applicants that reached the final application phase. They discussed  the planned as well as unanticipated consequences of lengthy and costly  application procedures, support and learning resources required  throughout, and risk factors that increased uncertainty.
Lengthy airline consent negotiations—Public-sector airport  owners, consultants, and private investors that we spoke with all said  that obtaining the 65 percent consent from airlines to use lease or  sale proceeds from privatizing the airport for non-airport purposes was  the pivotal and most time-consuming requirement of the application  process. As depicted in figure 5 above, the privatization process for  the Luis Munoz Marin and Midway airports took a total of 38 and 83  months, respectively. Within those time frames, it took 25 months for  PRPA to obtain airlines’ consent for Luis Munoz Marin, and a  combined 26 months for Midway’s airline agreement for both  privatization efforts. Stewart was unable to obtain airline approvals to  use airport revenue for non-airport purposes; the airport’s owner, New  York, agreed to use the lease payments for airport purposes and to  recoup past state investments in Stewart and other state-owned  airports, in accordance with FAA’s airport revenue use policy. For Luis  Munoz Marin and Midway, PRPA and City of Chicago officials said  that it takes significant time to arrive at an agreement with the airlines,  then submit the agreement to FAA for review, and then share the  agreement with advance-stage private bidders for bid proposals and  negotiation purposes. Additionally, the private sector airport  stakeholders and PRPA representatives we interviewed said that  airlines’ negotiations added an additional layer of complexity and that  they believed the purchase transaction should be strictly between the  public “seller” and the private “buyer.” Representatives from two  airlines that occupied the position of having dominant air traffic at  Midway and Luis Marin Munoz airports at the time of airports’  applications said that it could potentially be more efficient if a  dominant airline assumed the responsibilities of coordinating the  negotiation with other carriers. Overall, the airline representatives we  spoke with said they were satisfied with their arrangements, while the  public airport owners said there was extra work and time expended to  get to an agreement with the airlines.
Evaluation and preparation of privatization deals by the public  airport sponsors can be costly—Because APPP applicants must  satisfy local, state, and federal requirements as well as potential  investors, the process of drafting the final airport use and lease  agreements becomes complex, requiring outside expertise. For  example, the City of Chicago spent $13 million overall on  privatization-related transaction costs in the first application, and $3.5  million in the second round, with both attempts failing to result in  privatization. The Puerto Rico Public-Private Partnerships Authority  spent $17.4 million in project costs from December 2009 to February  2013 that included but were not limited to costs associated with  feasibility studies, legal counsel, financial consulting, engineering and  technical consulting, and personnel and operating costs and service   Costs also included the estimated statutory fee payable to  charges.the IRS as a result of the elimination of tax-exempt bonds attributable  to the airport.
Public opposition—Public opposition to privatization can undermine  the public-sector airport owner’s interest in privatization unless the  goals and benefits are clearly stated. The community association we  spoke with in San Juan said that public concerns can potentially  impact public-sector airport owners during the privatization process. In  Chicago, two public interest groups we interviewed said that in their  view, the first round of privatization of Chicago’s Midway Airport was  not transparent and had limited public input. A representative of one  of those public interest groups said that the State of Illinois tried to  remedy this when it passed enabling legislation for the privatization of  Midway. In San Juan, a community association we spoke with said  that there were public concerns about the privatization, including over  the foreign ownership of the bidder. The FAA public docket included  written public comments and summarized responses from PRPA on  how it and Aerostar intended to address those concerns.Rico Public-Private Partnership Authority also provided public notice  about the privatization of Luis Munoz Marin on its web site.
External factors can also undermine success—External factors  can affect the outcome for public owners and influence decision- making by private investors. Given the lengthy timetable for  consideration, application, and review, changes in economic or  political climates can influence whether a deal is consummated.
Macro-economy—Changes in the economy, such as the onset of  a recession, can alter the value and outcome of a privatization of a  deal. In the first Midway privatization effort, a lease agreement  with a bidder was reached but failed to close, in part, because  broader financial problems in the economy left the private bidder  unable to secure sufficient financing. Since then, the FAA has  placed greater scrutiny on the potential private bidders’ proposed  funding and financing and applied this lesson when reviewing the  Aerostar bid for Luis Munoz Marin.
Shifting political agenda—In 1996, the city of San Diego entered  into an agreement with a private sector developer, Brown Field  Aviation Park LLC, to implement a comprehensive redevelopment  of Brown Field, a general aviation reliever airport, into an air cargo  hub and general aviation airport. After submitting a preliminary  application to the APPP in 1999, the City withdrew from the pilot  program in 2001 due, in part, to diminishing support from elected  officials and over concerns and opposition among the community  of the potential adverse affects of the airport’s being redeveloped  into a cargo hub. Civic and public interest associations and airport  experts we spoke with said that the decision to privatize municipal  assets, such as airports, can involve a highly political decision- making process. One private-sector airport investor stated that  political uncertainty reduces the private sector’s willingness to  invest in an airport as well.
Performance risks—Even after privatization occurs there is a risk  of poor performance by the private-sector airport operator if the  lease is not properly executed. In the case of the Stewart, as  previously discussed in this report, NEG shifted its business focus  from airports soon after it assumed the lease. NEG managed the  airport for immediate financial return and was not interested in  investing in the airport. As noted above, the airport was acquired  by the PANYNJ in 2007 after 7 years under private operation. The  PANYNJ officials we spoke with said that the Port Authority made  far greater investments compared to NEG to bring the airport up to  Port Authority standards and to retain a key airport tenant.
section_title: Public-Sector Airport Owners Can Attract Private Capital and Expertise without Ceding Airport Control
paragraphs: Public-sector airport owners have found ways to raise private sector  investment in their airports and attract expertise without ceding control of  their airports. A recent report by the House of Representatives,  Committee on Transportation and Infrastructure’s Special Panel on  Public-Private Partnerships similarly found that airport owners have  partnered with airlines and others for terminal modernization programs.  Two public-sector airport owners we spoke with that explored but chose  not to go through the APPP or instead sought access to private capital for  projects, said they wanted to retain control of the airport and obtain  private capital and airport operation and management expertise, all within  a quicker timeframe. In addition, three private-sector airport  stakeholders we spoke with said that public-private partnerships can  achieve many of the same goals as full privatization. Furthermore, some  of these private sector stakeholders said that the public-private  partnerships take significantly less time than undergoing full privatization  because such partnerships involves fewer parties and less outside  review. The following examples of different types of private activity at  major commercial service airports demonstrate that many of the benefits  of full privatization can be achieved without ceding airport control.
Gary International Airport management and development  contracts—The City of Gary, Indiana, wanted to expand Gary  International Airport, improve its management, and seek economic  development in the community, without relinquishing municipal control  to a private operator. In January 2014, the Gary/Chicago  International Airports Authority entered into public-private partnership  that includes a 10-year management contract (with up to 30 years of  extension) with private operator AvPorts and a multi-year  development agreement  with a related development firm, AFCO, to  outsource both airport operations and to spur economic development  on and around the airport. Both the Gary City officials and the private  operator representatives said that the process took less than one year  and was a positive collaborative effort that allowed each party to take  advantage of specific benefits, and both said that a full privatization  would have been a complex, lengthy process and limited these  outcomes.
LaGuardia International Airport terminal developer contract—The  PANYNJ sought bids for the redevelopment of the airport’s current  central terminal from October 26, 2012, through January 25, 2013.  According to a Port Authority official, the PANYNJ lacked sufficient  financing to undertake the project on its own as it would have taken  too much time to accumulate the funds to do so. According to the  PANYNJ, the terminal project calls for a new 1.3-million-square-foot  terminal with 35 gates and will include the replacement and financing  of the central terminal building, including roads, utilities, a central  heating and refrigeration plant, and other support facilities.  Additionally, the winning bidder must also work with the PANYNJ in  operating the existing central terminal during construction, manage  the transition of airline and non-airline tenants to the new facility as  well as operate and maintain the plant and the terminal building for a  specified term. The private sector investors will receive a portion of  the central terminal building’s revenue in return for their investment.  Presently, the PANYNJ has narrowed the bidder to three prequalified  teams.
Detroit Metropolitan Airport, McNamara Terminal—This $1.2  billion terminal project was completed in 2002 and included 97 gates,  baggage area, parking garage, an indoor tram, and shops and  restaurants. The project was financed through a public-private  partnership between Northwest Airlines and the airport sponsor,  Wayne County, with a major portion of the project funded through  PFC revenues and associated airside projects funded through AIP  grants. The airline acted as the developer and general contractor of  the project, and continues to operate it today. Wayne County retains  ownership rights to the terminal.
Indianapolis International Airport management contract—As  reported by ACRP, in the 1990’s, the mayor of Indianapolis pursued  privatization as a way to address pension funding deficits, meet  unfunded infrastructure needs, and provide jobs and attract economic  development. The Indianapolis Airport Authority (IAA), the public  sector airport owner, considered full sale or lease of its general  aviation and commercial airports but decided that getting regulatory  approval would be difficult. Therefore, the IAA entered a 10-year  management contract with British Airports Authority (BAA) to manage  its system of general aviation airports and Indianapolis International  Airport. BAA contracted to manage the airport and attract new airline  service, increase nonairline revenues, reduce operating expenses,  improve customer service, and improve the diversity and expertise of  airport staff. The BAA earned a management fee annually based on  how much it helped airlines save on costs per passenger. BAA and  the Airport Authority agreed to an extension of the management  contract to 2008, with the extension to include a major terminal  redevelopment project. As the initial operating efficiencies were  realized, it became difficult for BAA to obtain further financial returns.  And as the compensation formula became unwieldy to calculate for  both BAA and the Authority, both parties agreed to terminate the  contract early in 2007, and the airport system was returned to public  sector management. According to ACRP’s case study of the airport,  most airport staff were transferred back to IAA with increased and  diversified skills and the airport system saw an increase in airline  traffic.
In addition, FAA officials noted that many airports have considered  changes in ownership, governance structure, or day-to-day management  for a broad range of reasons, including avoidance of personnel or  procurement restrictions, lack of agility in policy-making and operational  control. The officials noted that municipally-owned airports considering  privatization may learn of other available solutions to their challenges  including simple transfer to a single-purpose airport authority. In 2009,  ACRP reported that airport ownership transfers from general government  departments to single-purpose or limited-purpose government or private  entities were on the rise. ACRP’s recent report on airport privatization  also suggests that a single purpose airport authority may not be attracted  to privatizing any of its airport assets under the APPP because such an  authority will likely not have any desire, incentive or even ability to  transfer sale or lease proceeds from a privatization to general  government programs outside its purview.
section_title: Potential Effects of Airport Privatization Are Difficult to Determine
paragraphs: We found that the potential effects of airport privatization on airport  efficiency, the Federal Airport and Airway Trust Fund, federal tax  revenues, and airport employees and concessionaires are difficult to  estimate. As discussed below, this difficulty is partly due to the lack of  experience with privatization in the United States, as well as the wide  array of potential variables that could affect the viability of a particular  airport privatization.
Efficiency of airport operations—Privatization may not significantly  affect the efficiency of U.S. airports. Fourteen of the 42 airport  stakeholders and experts we interviewed noted that one benefit of  airport privatization tends to be greater efficiency in airport operations  due to the private-sector airport operator’s profit motive which  contrasts with public-sector airport owners’ goals that can compete  with efficiency, such as increasing local employment or satisfying  community or environmental concerns that may result in more  expensive labor and procurement costs than private-sector airport  operators may have.  As a result, some of these stakeholders argue  that a private owner may be more likely than government sponsors to  find the greatest efficiencies in operations.   However, as discussed  earlier, there already is extensive private-sector involvement at U.S.  airports, particularly for non-aeronautical operations, such as parking  and food service, which are operated by private-sector vendors or  concessionaires.  Similarly, airlines and outside groups have invested  in airport facilities, such as in new terminals, which have provided  private sector input into the airport’s management decisions and  incentives to control costs for both the private and public sector.   Finally, on the airside of airport facilities, private sector airport  operators may also still be bound by the same AIP grant obligations  that public-sector airport owners are, such as prevailing wage laws or  Buy America provisions, thus reducing the potential efficiencies that  may be achieved by transferring airport operations to the private  sector.  Some academic research has examined efficiency outcomes  under various airport ownership structures and found mixed results as  to the extent that privatization enhances the efficient operations of  airports.
Federal expenditures—Airport privatization would likely have little or  no impact on expenditures out of the Federal Airport and Airway Trust  Fund. As stated above, airports privatized through the APPP are  eligible for AIP grants albeit with a larger matching contribution for AIP  discretionary grants. We reviewed capital improvement information  that was submitted by seven airports seeking to privatize through the  APPP, and found that all of them depended on capital investments  from AIP apportionment grants.taxes paid into the trust fund by airline passengers would not change  if an airport privatized. Nevertheless, to the extent that privatized  airports receive reduced AIP grants, those funds would presumably  become part of the total available AIP grant funds provided to other  airports, leaving the total disbursements from the trust fund  unchanged.
At the same time, the amount of
Federal tax revenues—The extent to which an airport privatization  would affect federal tax receipts is difficult to estimate because many  of the determining factors are unknown. The factors that would  determine the net effect of a full airport privatization on federal tax  revenues include: whether the government owner of the airport provides tax-exempt  financing for the airport facilities through qualified private activity  bonds under the privatization arrangement;  the type of entity the new investor is and, if it is a pass-through  entity such as a partnership, the type of taxpayers its partners  are;  the profitability of the new investor, as determined according to  federal tax rules; the extent to which the taxable incomes of independent  concessionaires operating at the airport are affected by the  privatization;  the amount of federal taxes, if any, that the investor would have  paid on income from the alternative investment it would made if it  did not participate in the airport privatization; and the use that the public owner makes of whatever payment it  receives from the investor.
The government’s detailed use of the payment would be difficult to determine with  certainty due to the general fungibility of government funds.
Under the APPP, any collective bargaining agreement that is in effect on the date of the  sale or lease shall not be nullified by the sale or lease. 49 U.S.C. § 47134(c)(9). However,  a private sector airport operator would have had or has the ability, just as the public sector  owner would have, to renegotiate labor contracts once they expired as well as  renegotiating or opening up concession contracts for competition. and prevailing wage requirements, and for the second privatization  attempt, City of Chicago officials stated that while the APPP did not  require it, every city employee at Midway would have a position with  similar employment terms and conditions at either the new operator’s  company or the city. In addition, while all of the Puerto Rico Ports  Authority employees at Luis Marin Munoz were interviewed for jobs  with Aerostar, according to Aerostar representatives, Aerostar was not  required by either the APPP or the terms of the agreement with PRPA  to re-hire those employees. Many PRPA employees at the airport  chose to stay with the PRPA. For example, out of the 400 employees  from the managerial staff, only about 15 accepted jobs with Aerostar.  Union officials we spoke with who represent the managerial staff  affected stated that so few accepted Aerostar’s offer because they did  not know what their jobs were going to be and therefore chose either  to remain with PRPA or to retire. Existing concessionaires may also  be affected by privatization. We spoke with two concessionaires at  Luis Munoz Marin who believe that the new airport operator is  infringing their long-standing concession agreements, and they are  currently trying to resolve their disputes with PRPA and Aerostar.
section_title: Airport Privatization Is More Prevalent in Other Countries and Stakeholders’ Views on Privatization Vary Widely
subsections: section_title: Different Airport Ownership Structures, Motivations, and Financing Drives Airport Privatization in Other Countries
paragraphs: There are several reasons why privatized airports are more prevalent in  other countries than in the United States. At least 450 airports around the  world have some form of private-sector participation in their management  or ownership. First, in several countries the national government built,  owned and operated the country’s airports prior to privatization. The  International Civil Aviation Organization (ICAO) has examined the efforts  of 25 countries to privatize their airports. Prior to privatization, the national  government in 19 of those 25 countries owned all or most of the major  airports in those countries. National ownership of airports allows the  central government to direct the sale of their airports and can make for a  more streamlined privatization transaction, reducing transaction costs for  both the public-sector owner and private-sector bidders. For example,  seven private-sector airport stakeholders we interviewed stated that  international airport privatization transactions have tended to involve the  seller (such as the national government) and prospective buyers with no  other stakeholder involvement (such as local governments, airlines, labor,  etc.). In contrast, as we have noted above and as Congressional  Research Service (CRS) has reported, U.S. airport privatization  transactions involve four major stakeholders (public-sector airport owners,  private sector investors, airlines and the federal government), each  representing different and often competing interests in an airport  privatization. This adds a complexity that is generally not present  elsewhere.
Second, foreign governments may be more motivated to privatize their  airports than U.S. public sector airport owners may. According to ICAO,  the reasons these governments had for privatizing their airports varied,  including need for private sector capital investments in existing or new  airports and a national move toward privatization of public assets or  companies. For example, the government of the United Kingdom  privatized the airports it owned in 1987 as part of a larger program of de- nationalization of nationally-owned industries and utilities. More recently,  the national government of Brazil privatized several major airports to  secure private sector investments in those airports prior to the 2014  World Cup and 2016 Olympics. In contrast, only Ronald Reagan  Washington National Airport and Washington Dulles International Airport  are owned by the federal government, with the rest owned by state,  regional, or local governments—making a national decision to privatize  U.S. airports much more unlikely.
Third, airports in other countries have less access to public funds or tax  subsidies than publicly-owned and operated U.S. airports, making them  more reliant on private financing for airport improvements. As we have  noted above, a key consideration for U.S. airport privatization is the loss  of some AIP funds and the loss of easy access to tax-exempt financing.  For example, the House Transportation and Infrastructure Committee’s  Panel Report found that a major reason why public-private partnerships  were more common overseas was due to the lack of access to tax- exempt financing that exists in the United States. Since the owners of  foreign airports generally do not have these financial advantages, they do  not have to account for their loss when privatizing and, according to CRS,  would not necessarily have greater capital costs if they were to  privatize.
section_title: Stakeholders Provided a Wide Variety of Views on Lessons Learned from U.S. and Foreign Airport Privatizations
paragraphs: To address some of the challenges to airport privatization that we  identified, such as the length of time and complexity of negotiations, 31 of  the 42 airport stakeholders and experts we interviewed provided a wide  variety of insights from their experiences with both international and U.S.   See appendix II  airport privatizations and cited various lessons learned.for the full list of the lessons learned mentioned by stakeholders. The  three lessons learned most frequently mentioned were:
Ensure that the public-sector airport owner conducts due  diligence prior to privatization—To varying degrees, nine  stakeholders stated that the public sector airport owner should ensure  that it establishes goals for privatizing the airport, know the value of  the airport, and understand the process for privatizing the airport. The  privatization effort may be jeopardized if these activities are not  completed prior to starting the privatization effort. For example,  according to one private-sector airport consultant we interviewed,  public officials at one airport the consultant was familiar with decided  to privatize without knowing what privatization would entail, what they  wanted to achieve from privatization, and how much the airport was  worth by obtaining an independent evaluation of the airport’s value.  As a result, the public- sector airport owners decided that the private  sector response to their request for qualified operators was  inadequate and the airport’s privatization application was withdrawn.  In contrast, according to a private sector airport consultant and the  officials responsible for the Luis Munoz Marin privatization and for the  Gary airport agreements, the public airport owners at both airports  established clear objectives, engaged consultants to independently  determine the value of the airport, created reports detailing this  information, and held outreach and public comment meetings—all of  which had a positive effect on public support to finalize these deals.  For example, the Puerto Rico Public-Private Partnership Authority  conducted a study that was released to the public prior to submitting  the application to the APPP outlining the options for Luis Munoz Marin  and that showed the reasons why Puerto Rico should privatize that  airport.
Create a transparent privatization process—Seven stakeholders  suggested that public airport owners should lay out an open process  with a schedule showing major milestones as to how their airport will  be privatized, a process that one stakeholder stated could increase  stakeholder acceptance of the privatization. Two of the seven  stakeholders, who were representatives from public interest groups  we interviewed, stated that a transparent process can help ensure  that the local community’s interests are protected in privatizations in  addition to providing the public with assurance that the public sector  owners have a plan for using the sale or lease proceeds. According to  one private-sector airport operator we spoke with, transparency and  clarity about how the process will affect airlines and concessionaires  can also lead to more bidders and lower transaction costs for the  public sector airport owner as well. For example, the Puerto Rico  Public-Private Partnership Authority set an established process for  privatizing any public asset held by the Commonwealth of Puerto  Rico, and that process was followed and, as noted above, made  public in the privatization of Luis Munoz Marin. Additionally, the City  of Chicago added, among other things, a Midway Advisory Board and  pledged that the City Council would have 30 days to review any  potential privatization deal to the requirements for the second Midway  privatization effort.
Involve all airport stakeholders in the privatization process—Six  stakeholders we interviewed stated that not all airport stakeholders,  such as airlines in foreign airport privatizations or airport labor or  concessionaires, are consulted or involved in deciding whether to  privatize an airport or on the structure of the airport privatization. For  example, three airport labor and concessionaire groups we spoke with  about the privatization of Luis Munoz Marin stated that they did not  receive much information about the privatization of the airport from the  Puerto Rico authorities during the process, leading them to oppose  privatization as they did not know what was going to happen to their  jobs or their concessions if the airport was privatized. In some foreign  transactions one stakeholder analyzed, airlines were not consulted for  several privatizations and charges to airlines and airline passengers  increased. However, as previously discussed, several private-sector  airport operators, investors, consultants, academic experts, and  former public airport operators stated that airlines had too much say in  the APPP privatization process. These stakeholders stated that  negotiating with the airlines to secure their approval was the longest  part of the privatization process.
section_title: Stakeholders Provided Wide Variety of Views and Options for the APPP
paragraphs: Twenty-three of the 42 stakeholders and experts we interviewed offered a  range of suggestions to change the APPP, ranging from relatively small  changes that FAA could implement, such as increasing FAA involvement  earlier in the process, to more substantial changes that would require  congressional action, such as reducing or eliminating airline approval to  use the proceeds of the privatization for non-airport purposes. The effect  that any of these changes may have on either the decision by public  airport owners to privatize or on the APPP process itself, however, is  unclear. CRS noted that while streamlining the APPP process might  make privatization somewhat more attractive, the public sector’s gains  are unclear and the private sector’s gains are limited from privatization  under the APPP and major structural changes to the existing U.S. airport- financing system would be required to significantly increase interest in  airport privatization in the U.S.
In contrast, nineteen stakeholders we interviewed had no suggestions on  how to change the airport privatization process in the United States. Two  stakeholders (one whom did offer suggestions to improve the APPP and  one who did not) did not see airport privatization as a solution to their  airport funding or efficiency concerns. Representatives from one airline  trade organization we interviewed stated that airlines are looking for  airports that are cost-efficient while a representative from another airline  trade organization viewed privatization as a solution to a non-existent  problem. One public sector airport owner also stated that an increase in  the federal PFC cap could provide as much capital investment as the  amount of private capital that could come with privatization. See appendix  III for a full list of the options mentioned by stakeholders we interviewed.  Some of the most common recommendations mentioned by stakeholders  included:
Change the airline approval requirement in the APPP—Ten  stakeholders we interviewed stated that the requirement to gain  approval from the airlines serving an airport being privatized should  be modified. Two stakeholders cited that this approval process is the  longest part of the current privatization process, necessitating  consultation with the airlines for any significant changes to the lease  agreement. One private-sector airport stakeholder who suggested that  this requirement should be changed noted that public-sector airport  owners are able to negotiate other commercial deals without airline  approval. The stakeholder stated that even absent the airline approval  requirement in the APPP, the FAA would still have the authority to  regulate aeronautical rates and charges through their AIP grant  assurances. In addition, the requirement possibly reduces of the value  of the deal as airlines have sought concessions to secure their  approval. However, outside of these 10 stakeholders, all four of the  airline stakeholders we interviewed stated that the airline approval  requirement should be kept, as it provides the airlines meaningful  input into the privatization deal to ensure balance between the airlines  and the private-sector airport operators and is a critical to a successful  privatization deal.
Reduce uncertainty and increase the clarity of federal rules—Five  public and private sector stakeholders mentioned that the APPP  process could be improved by having the FAA more involved earlier in  the privatization process, mainly to educate the public sector airport  owner seeking to privatize the airport. As mentioned above, the FAA  is responsible for reviewing applications from public sector airport  owners looking to privatize through the APPP. However,  representatives of an airport consultants’ trade group we interviewed  noted that without more information during the decision to privatize,  public sector airport owners may not have all the information needed  prior to going through the APPP process, a lack that may have led  some airport owners to withdraw from the program. FAA officials  stated that in light of their early APPP experience, they are becoming  more proactive with public sector airport owners to let them know  what can be expected from the process. One public-sector airport  owner we spoke with stated that the Department of Transportation  (DOT) and FAA need to communicate more clearly on the criteria  used to review the request to waive repayment of federal grants and  that they should provide early response on that decision. One private- sector airport investor stated that private-sector investors look for  certainty and reduced risk and look to invest in airports in countries  that, among other things, have clear regulations. More communication  and earlier waiver decisions could reduce uncertainty surrounding the  privatization process.  FAA officials stated that they strive to provide  key decisions in a timely manner based on the information they  receive in the APPP applications.
Reduce federal involvement in airport privatizations—Four airport  stakeholders we interviewed stated that FAA involvement in airport  privatizations could be reduced to encourage more privatizations. One  private-sector airport stakeholder stated that the APPP has too many  regulations and disincentives for public-sector airport owners to go  through the process and that the length of the process serves as a  deterrent to private investors who may not want to wait several years  to invest their funds and can make investments elsewhere. Two of the  four stakeholders mentioned that eliminating the APPP requirements  would let the market determine the best deal for the airport. Three of  the four stakeholders also stated that an automatic waiver of the  requirement to return federal funds from a privatized airport would  eliminate the uncertainty of whether the Secretary would grant a  waiver during the APPP process. Under these various suggestions,  the FAA would still have some degree of oversight because it would  still review the transfer of the airport’s operating certificate to a  qualified operator and have regulatory authority over aeronautical  rates and charges under the AIP grant agreements, but otherwise, the  FAA would not have responsibility for approving the sale or lease.
section_title: Concluding Observations
paragraphs: Privatization has the potential to provide additional investment in airports,  to ease constrained local budgets and to share with the private sector the  financial and operational risks of running an airport in today’s challenging  air travel market. However, the current structure and financing of airports  in the United States, in conjunction with the current privatization process,  reduce the incentives and value of privatization while increasing costs  and risks for both public-sector airport owners and private-sector  investors. The result has been a small number of applications and the  even smaller number of resulting airport privatizations in the APPP’s 18- year existence. The privatization of San Juan’s Luis Munoz Marin  International Airport demonstrates that privatization can occur in the U.S.  if both the public and private sectors see that the benefits outweigh the  costs. Meanwhile, instead of privatization under the APPP, many public- sector airport owners have engaged the private sector through a variety  of partnerships ranging from management contracts to development  agreements to help reduce costs, improve services, and obtain capital  investment without transferring airport control. While privatization may be  an option for those public-sector airport owners that determine the  potential benefits outweigh the costs, the current structure of the U.S.  airport system provides for a broad range of private-sector participation  making full privatization less likely.
section_title: Agency Comments
paragraphs: We provided a draft of this report to DOT for its review and comment.   DOT provided comments in an email that emphasized that privatization  can in certain circumstances provide financial benefits to the airport  sponsor and broader economic development to the surrounding  community, if the new operator is willing to make investments in the  airport that the public sponsor cannot.  DOT also provided technical  comments which we incorporated as appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Secretary of Transportation and other  interested parties.  In addition, the report will be available at no charge on  GAO’s website at http://www.gao.gov.
If you or members of your staff have questions about this report, please  contact me at (202) 512-2834 or dillinghamg@gao.gov.  Contact point for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report.  Major contributors to this report are listed  in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of this report were to examine (1) the experience with the  APPP since inception; (2) the challenges airport owners and investors  face when seeking to privatize U.S. airports within and outside the APPP;  (3) the potential effects of airport privatization; and (4) the lessons that  can be learned from U.S. and international airports that have been  privatized.
To describe the experience with the APPP since its inception in  September 1997, we reviewed all 10 airport applications in the FAA’s  APPP docket and populated a data collection instrument to identify  applicants’ goals and plans for privatizing their airport as well as rationale  for their withdrawal from the pilot program. We used this information to  summarize the typical pilot program application process and roles of  public-sector airport owners, airlines, private sector investors and  operators and the FAA. We also reviewed documents in FAA’s dockets  for each APPP application and FAA’s APPP applications procedures, as  well as interviewed FAA officials to determine their participation and that  of public airport owners who applied to the APPP from 1997 to the  conclusion of our audit work in November 2014. We reviewed the legal  history of the APPP including the original legislation creating the program  and the 2012 FAA reauthorization law that modified the program. We  interviewed airport stakeholders such as city or municipal government  airport owners, airport concessionaires, airport labor representatives,  local community public-interest and business groups, and air carriers, and  private sector airport operators and investors about their roles and  responsibilities during their APPP experience. We selected these  stakeholders based on our review of the public docket documents for  applicants to the APPP, our prior work on airports, and the stakeholders’  work on U.S. or foreign airport privatizations. The results of these  interviews are not generalizable.
We also interviewed key officials in FAA’s headquarters, Great Lakes  Region, and Southern Region offices that oversaw the application  process for Luis Munoz Marin International Airport (Luis Munoz Marin) in  San Juan PR; Chicago Midway International Airport (Midway) in Chicago,  IL; and Airglades Airport in Hendry County, FL; as well as Gary-Chicago  Airport in Gary, IN; and Branson Airport in Branson, MO; that chose not to  apply to the APPP. We conducted site visits to Chicago, Illinois, and San  Juan, Puerto Rico, to interview FAA and local community and airport  stakeholders for the Midway and the Luis Munoz Marin APPP  applications and processes. We selected these two sites as they were the  largest airports to have submitted final applications to the APPP, with  Midway remaining under public sector operation while San Juan Luis  Munoz Marin transferring to the private sector. We spoke with 42 airport  stakeholders (including public sector airport owners; private-sector airport  investors, consultants and operators; the FAA; and airlines, among  others) and academic and other experts concerning the APPP. We  identified these stakeholders from the APPP docket documents and  interviews with FAA officials and our prior work on airports and the air  transport industry. The results of these interviews are not generalizable.
To determine challenges to airport privatization, we conducted a statutory  review of potential challenges or obstacles that could result from federal  restrictions on use of airport sales proceeds and airport-purchase  financing structures imposed on municipal sponsors and private investors  that enter privatization transactions both within and outside the pilot  program. We reviewed our 1996 report on issues concerning airport  privatization to serve as a baseline for determining how the APPP  addressed those issues since then. We conducted interviews with FAA  headquarters and regional officials; municipal and public airport  authorities that own and operate commercial service airports; airlines;  private sector airport operators and investors; private-sector airport  privatization consultants, airport operators and investors, academic  experts, and bond-rating agencies. For challenges within the FAA pilot  program, we conducted semi-structured interviews with pilot program  applicants and their consultants and potential private partners to identify  challenges, costs, and obstacles throughout the process and how they  were addressed. The results of these interviews are not generalizable.
To examine the possible influence of privatization on airport efficiency, we  interviewed a variety of knowledgeable stakeholders and also reviewed  some academic work that examined this issue. The results of these  interviews with knowledgeable stakeholders are not generalizable. To  determine the potential impacts of airport privatization on Airport and  Airway Trust Fund and on federal tax revenues, we analyzed current AIP  rules and regulations and reviewed applicable tax law in addition to  interviewing consultants and lawyers who worked for both the public and  private sectors in airport privatizations under the APPP. To determine the  potential impact on airport labor and concessionaires, we reviewed APPP  documentation and its legal requirements and interviewed airport labor  representatives and concessionaires in Puerto Rico about their  experiences since Luis Munoz Marin was privatized and City of Chicago  Department of Aviation officials as to how Midway would have been  privatized. For perspectives on challenges and benefits of airport  privatization and public-private partnerships outside the FAA pilot  program, we interviewed representatives from Branson Airport, the only  privately operated commercial service airport that did not go through the  APPP process in the United States and Gary-Chicago Airport, whose  public sector owners opted for private management of the airport outside  of the APPP process as well. We also interviewed investors and  consultants that are active in airport public-private partnerships to get  their perspectives on the potential benefits and advantages that offset  costs or challenges for partial privatization of commercial service airports  in the United States. The results of these interviews are not generalizable.
To identify lessons learned from airport privatization in the United States  and countries abroad, we reviewed industry and think-tank reports and  articles about airport privatizations and interviewed knowledgeable  experts who have participated in airport privatizations around the world. In  addition, we reviewed selected airports with similar governance and  finance structures as U.S. airports to find the most comparable cases that  had privatized in the last 20 years for more information about how these  airports were privatized. We selected Frankfurt Airport in Frankfurt,  Germany; Vancouver International Airport in Vancouver, Canada; and  London Luton Airport in Luton, United Kingdom. We reviewed the United  Nation’s International Civil Aviation Organization’s country reports on  airport and air navigation service privatization reports for 25 countries to  determine basic elements of airport privatization initiatives around the  world as well as ACRP’s and CRS’s recent reports on airport privatization  in the U.S.
Out of the 42 total stakeholders we interviewed (see table 1 below), 31  (airport stakeholders from the FAA, public-sector airport owners, airlines,  and private-sector airport owners, operators and consultants) mentioned  lessons learned from airport privatization in the United States or abroad.  Twenty-three stakeholders and experts out of the 42 interviewed offered  suggestions about how to improve the APPP. We interviewed the airports’  municipal sponsor, private operator, and representatives from an air  carrier and community associations in Chicago and the municipal  sponsor, private operator, an air carrier, concessionaires, and a labor and  a community group in San Juan to gather information about the  privatization process under the pilot program including lessons learned  that lead to the success and withdrawal of the applications (respectively).
In San Juan, we also interviewed the stakeholders about the preliminary  results and impacts of the transition from a public to private operator for  Luis Munoz Marin. The results of these interviews are not generalizable.
We conducted this performance audit from January 2014 to November  2014 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Airport Privatization Lessons Learned Offered by Stakeholders Interviewed
paragraphs: Thirty-one airport stakeholders and experts offered lessons learned from  prior airport privatizations out of a total of 42 stakeholders and experts  interviewed. Some stakeholders and experts offered more than one  lesson learned. Eleven stakeholders and experts we interviewed did not  offer any lessons learned.
section_title: Appendix III: APPP Improvements Mentioned by Stakeholders Interviewed
paragraphs: Twenty-three airport stakeholders and experts offered lessons learned  from prior airport privatizations out of a total of 42 stakeholders and  experts interviewed. Some stakeholders and experts offered more than  improvement to the APPP. The remaining 19 stakeholders and experts  we interviewed did not offer any suggestions to improve the APPP.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, the following individuals made  important contributions to this report Paul Aussendorf, Assistant Director;  Amy Abramowitz; Thomas Beall; Leia Dickerson; Mya Dinh, Greg Hanna;  David Hooper; Delwen Jones; Jennifer Kamara; Joshua Ormond; and  James Wozny.