The Case for Privatizing LAX

The recent national transportation policy announcement by Transportation Secretary Samuel K. Skinner represents a sharp turn. State and local governments will be called upon to provide more of the nation’s infrastructure needs under the Bush Administration. Given Los Angeles’ unmet infrastructure needs, this announcement hits this city especially hard.

But it doesn’t have to. Los Angeles already has a huge untapped revenue source that could help pay several major bills facing it: Los Angeles International Airport. By selling LAX--turning it into an investor-owned utility--the city could generate $1.5 billion to $2 billion.

That would be more than enough to finish upgrading the Hyperion sewage treatment plant and other aging sewage facilities ($100 million); to fix the 459 city-owned bridges and 84 buildings that need $376 million in repairs to meet earthquake standards and to do something about housing for the homeless, which is virtually non-existent as downtown revitalization continues to eliminate single-room-occupancy (SRO) buildings.

And enough funds would be left to start addressing other city responsibilities that are on shaky ground: the city’s Employee Retirement System, which has $748 million in unfunded pension liabilities, and the Fire and Police Pension System, which has an even bigger $3.6 billion in unfunded liabilities.

We can’t put off dealing with these shortcomings, yet conventional wisdom offers no solutions. Rebuilding the city’s physical and financial infrastructure will cost billions of dollars. Property tax rates can’t be raised because of Proposition 13, and there’s no chance of putting through some other local tax of that magnitude. Los Angeles officials should heed the message given by Skinner and seek private sector involvement in LAX.

By selling LAX and letting it operate as an investor-owned utility (like Southern California Edison or Pacific Bell), Los Angeles would reap a one-time windfall of $1.5 to $2 billion to use for infrastructure. And as a commercial company, all of LAX Inc.’s 3,583 acres would go onto the property tax rolls, like other businesses, generating the full 1% of market value allowed under Prop. 13--about $15 million to $20 million per year.

For some reason, we continue to think of airports as fragile entities that must operate essentially as break-even public services instead of the robust, cash-generating businesses that they actually are. Why should Los Angeles have to tie up its capital in LAX, to serve only those people who fly, when there are far more pressing needs?

Considerations such as these have caused thoughtful people to begin looking seriously at the idea of selling major commercial airports. Last December, state Assemblyman Richard Katz (D-Panorama City), chairman of the Transportation Committee, held a public hearing in Los Angeles on the possible “profitization” of LAX. A liberal, Katz opened the hearing by pointing out that “like many other cities, Los Angeles has assets which are possibly not being fully utilized.” The city, he noted, derives no profit from the airport, despite its large revenue potential.

Other public officials are seriously considering airport privatization. On March 30, Caltrans Assistant Director Carl Williams, Rep. Christopher Cox (R-Newport Beach) and LAX Director Clifton A. Moore will join Lockheed Air Terminal Inc. President Viggo Butler and me in a public seminar in Los Angeles to discuss the various issues of airport privatization.

Airport privatization is not just a theoretical proposal; it has started to happen overseas. Britain’s conservative Thatcher government was the first to sell its airports. British Airports Authority went on the market in July, 1987, and brought in a cool $2 billion from investors who bought shares. London’s Heathrow, Gatwick and Stansted airports are now efficient private enterprises, along with the four main Scottish airports.

As Katz’s interest makes clear, the idea of liberating government capital from airports transcends party labels and ideologies. Overseas, governments ranging from the social democratic Danes to New Zealand’s Laborites to the right wing South Africans are planning to sell airports within the next few years. Here at home, the first airport sale plan to reach the Federal Aviation Administration for approval came from Albany, N.Y., last December. Its chief proponent was County Executive James Coyne, a Democrat.

Unfortunately, the FAA’s initial bureaucratic reaction was to flap its arms, turn shades of purple and say, “Oh no you don’t!” That seemed a mighty strange reaction from a branch of the Transportation Department in a Republican Administration supposedly committed to privatization of government functions. The department quickly realized its faux pas , and three task forces (two internal, one from industry) have been assigned to review the whole issue of airport privatization and recommend a coherent federal policy on the subject.

Meanwhile, the Los Angeles Department of Airports is well under way with a yearlong study by its financial consultant on the feasibility of selling LAX. “The issue is getting the value out of what the city owns,” says LAX director Moore. “The only practical way to get that money out is to sell or lease the asset over the long term to people with a lot of money, or to form a utility and float stock.”

Going private would probably cut off LAX from federal airport grants. But that would not be much of a loss. A Reason Foundation study determined that LAX gets back in annual grants less than 12% of the $150 million or so in airline ticket tax revenue sent to Washington by LAX passengers. As a private enterprise, LAX would be able to charge fees for its services--and keep all the money here to use for modernizing the airport.

The Transportation Department is looking into airport privatization for two main reasons. First, there’s a growing national shortage of airport capacity that can only be cured by increased investment in airports. Turning airports into businesses will attract such investment. Second, the department and Congress are also concerned about lack of access to major airports for smaller airlines--which often leads to higher prices because of lack of competition. (In California, Southwest Airlines would love to offer more low-priced service--if only it could find additional gates.) Profit-minded airport operators are seen as more likely to invest in more gates to attract more business.

Thus, airport privatization can be a win-win proposition. Air travelers get an expanded, more competitive air travel system, while local governments retrieve their capital for other pressing needs. Many details remain to be worked out, but converting airports into businesses looks like an idea whose time has come.