Public Ownership: Change Is in the Air
George Bush & Co., the Washington-based administrative and national defense firm, has a bright idea for Los Angeles. The city should sell its international airport and use the money to rebuild from the riots. The firm is sending Dan Quayle, vice president and field representative, to Los Angeles today to discuss the idea with Mayor Tom Bradley.
Local reaction has been emotional. Politically, the Bush Administration is suspected of sloughing off the responsibility and expense of helping Los Angeles.
Financially, privatization is seen as a fancy word for selling long-term assets to pay for current consumption, the way companies did in the 1980s. The nightmare vision is of LAX as Macy’s--burdened by debt, strapped for cash and operating hand-to-mouth in bankruptcy.
But emotion doesn’t do justice to the idea of privatization which, whatever judgment says about selling LAX, is an intelligent response to the harsh realities of public finance today.
Los Angeles, facing a budget deficit just like many states and the federal government, has no money for the current emergency. And it is getting little sympathy. Aid for the city passed Congress over heavy opposition--including “no” votes by members from Orange County and even Long Beach.
So there’s appeal in the idea of taking in more than $1 billion by selling LAX to a private operator, especially as the city could then reap tax revenue where now it is barred by law from receiving airport revenue.
Still, sound business judgment would be not to sell LAX. In business terms, you don’t sell a long-term asset such as the airport to finance a one-time expense such as rebuilding from riots--if you can avoid it.
Instead, you try to get greater benefit from the asset, in this case by changing laws so that Los Angeles’ general coffers can capture some of the airport’s handsome surplus.
LAX took in $215 million last year from automobile parking, sales of food, drink and magazines, and from airline fees for landing and cargo. After expenses of $187 million for maintenance and other purposes, LAX showed a surplus of $27 million.
By federal law and City Charter, that money could not come to the city but remained a reserve for bondholders and part of the Aviation Trust Fund, which supports airports across the country.
LAX is sound, with $900 million in equity and about half that in long-term debt. The reckoning is it could be sold for $1.4 billion, based on handling 45 million travelers last year--a number expected to rise to 65 million in this decade.
The attraction to a buyer is that revenue could be increased by livelier commercial management, says Robert Poole Jr., president of the Reason Foundation, a Los Angeles think tank that supports privatization.
London’s Heathrow airport, which was sold to private owners in 1987, has gross sales of $23 per traveler, compared to $8 per traveler at LAX, Poole says. And Heathrow’s profit per dollar of sales is higher too--despite the outrageous prices at LAX coffee shops.
It’s a revealing flaw that landing fees at LAX, which contribute far less than parking and restaurants, are only 20% of fees at other U.S. airports. The reason is inertia. The fees date to agreements made in days of regulated air travel when airports made sweetheart leases with airlines. “The world changed but LAX leases didn’t,” says R. T. McNamar, a managing director of the investment banking firm Oppenheimer & Co.
That could change this year as the leases come up for negotiation. City Councilwoman Ruth Galanter is proposing to raise landing fees and change laws to bring airport money to the city.
But anticipate a fight. The major airlines won’t want fees raised, and neither will owners of corporate and private planes. The plane owners, with one of the most powerful lobbies in Washington, will deliver a blunt reminder that airports are governed by politics as much as economics.
The point is, they’re governed too much by politics. That’s one reason for the nationwide trend to privatization. Indianapolis, Dallas and New York are studying the idea for airports, and New York State is thinking of privatizing its Thruway.
You might say it’s an idea whose time has come again, since most services we now get from government--urban transportation, roads, ferries and water--we once got from private business.
For almost a century, though, the trend has been to public ownership, financed by tax-exempt municipal bonds. The philosophy was one of public utility, that government ownership would bring all citizens lower costs for essential services.
But tax-exempt public ownership is now proving costly, as city and state governments bear operating costs and risks, yet do not collect proportionate taxes.
And the philosophy that all citizens benefit from public facilities is being questioned: Do travelers and jet owners benefit more from LAX than the mass of citizens?
So change is in the air. You don’t have to sell the city airport, but you do extract a market price for use of the facilities--and allocate some of the revenue to benefit the general population.
In other cases, you may sell such public services as the sanitation department and levy taxes to meet the real needs of government. The issue is not privatization, but change.
