Privatization of Airports Has Ups and Downs

Toronto’s airport was besieged: Long lines of baggage-laden passengers snaked out of the terminals, customs clearance could take an hour or more, and runway delays were routine.

The harried scenes resulted from airline deregulation and a booming mid-1980s economy. Thousands converged daily on Lester B. Pearson International Airport with low-fare tickets, only to be frustrated by the wait.

Expansion was badly needed. The question was how to pay for it. Federal funding was unlikely because of Canada’s growing budget deficit. An answer was offered by the conservative government: Let the private sector develop and operate parts of the airport.

Today, champions of privatization hold up the Toronto airport as a showcase. Its privately run Terminal 3 is an airy facility where passengers leisurely buy tickets, browse in shops and exchange money before boarding their planes.

“Toronto is the best model around for privatization,” said Steve Steckler, a privatization specialist for Price Waterhouse in Washington.

That may be, but early this month Canada scrubbed plans to turn more of the airport over to private operators. The reason: charges that the former Tory government rewarded cronies with lucrative contracts at the expense of passengers and taxpayers.

The drama here in Ontario is unfolding as several U.S. cities, including Los Angeles, are considering selling or leasing their airports to pay for expansion or for other critically needed municipal services. Indeed, the transformation of the Toronto airport and others holds valuable lessons about placing public assets in private hands.

While privatization may be a tidy buzzword, the reality is often a messy affair, one unlikely to provide a painless solution to any city’s financial troubles: Airport operating costs, and thus ticket prices, often rise to pay for improvements. Jobs of municipal workers are threatened. Expected tax revenue may fall short of expectations. Politics can dominate the process.

Most important, privatizing an airport is a difficult balancing of the public’s need for safety and dependable service with a private operator’s desire to maximize profits and limit financial risk.

Still, privatization, particularly if structured as a public-private partnership, has strong appeal and is growing in popularity. It has been put forth as a more cost-effective way to inspect buildings in Indianapolis, run public parking lots in Chicago, guard prisoners in Texas and operate airports in London, Toronto and Albany, N.Y.

Privatization is on the agenda of Mayor Richard Riordan, who, during his campaign last spring, proposed to lease Los Angeles International Airport. The proceeds would be used to put more police on the streets, he said.

After the election, Riordan acknowledged that privatizing LAX would be difficult. Airport, airline and union officials oppose it. And federal law restricts diversion of airport funds to other uses.

Though still under study, the proposal is on hold. For now, Los Angeles seems content to boost airport revenues by raising the landing fees it charges airlines.

Putting municipal services in private hands is certainly not new. The practice has gained popularity in the last decade as governments on all levels looked for ways to reduce ballooning deficits.

The conservatives who came to power in the United States, Canada and Britain in the early 1980s were advocates of privatization. Their mantra: Private business is always more efficient than the public sector.

The first major airport privatization came in 1987, when the British government sold London’s Heathrow and Gatwick airports, and five other airports, to a private operator for $2.5 billion.

The operator, British Airports Authority, upgraded the facilities and added dozens of retail shops. The airports, which had been losing money, are now valued at more than $4 billion and had $370 million in operating profits last year.

But not everyone looks at privatization favorably. Airlines complain that their landing fees increase. Higher parking, taxi and concession prices bring charges of gouging.

“We have never seen a privatization that has brought costs down,” said Edward Merlis, vice president of policy for the Air Transport Assn. of America, an airline industry trade group.

Private operators do everything to increase profits, he said. The British Airports Authority did so in part by reducing support staff. One result: Heathrow passengers endure long waits at one of the entry points because only two of eight X-ray machines are operated.

At LAX, some proponents suggest that more airport retail development could bring greater profits, but Merlis said this would only increase congestion and pollution around the busy airport.

The airlines also worry that privatization will divert funds for purposes other than airport improvement. This issue undercut the sale or lease of Albany County Airport in New York in 1989.

Seeking to pay for airport expansion and free up funds for other government services, Albany County proposed selling the airport to Lockheed Air Terminal, a unit of Burbank-based Lockheed Corp., and a local partner for $30 million.

The airport was an important cog in the patronage system that fed the county’s powerful Democratic political machine. The airlines saw privatization as a way to get new terminals built faster and cheaper. The municipal workers union, allied with the county, went along with the proposal when they were assured that jobs would be cut only through attrition.

The Federal Aviation Administration, however, objected. The agency said the federal government was entitled to half the sale proceeds because it paid for half the airport’s construction.

Albany County then tried to lease the facility in a proposal that would secure an upfront cash payment and annual rent. The FAA balked again, because it feared airport revenues would be diverted from the airport.

“The FAA was afraid Albany was breaking a sacred code by sending money downtown,” said Kathy Fragnoli, an airport consultant and former real estate negotiator for American Airlines in Albany.

Also, the FAA said the lease would jeopardize federal grants that can be given only to publicly run airports. So Albany retained control of the airport and hired Lockheed to manage it.

Viggo Butler, president of Lockheed Air Terminal, said Albany convinced the company that forming a public-private partnership is a better alternative than an outright sale.

“It (a sale) is not legally prohibited per se, but it is not practical,” he said.

Legal experts say it is possible to structure leases that do not threaten federal maintenance and operations funds. And the Clinton Administration is supportive of public-private partnerships. These two factors are considered crucial if LAX is to be privatized.

Albany also proved to Lockheed that its operations could be cost-effective. But some observers say there are no conclusive studies that show private management is better than public operation of airports.

“We have to prove our case,” Butler conceded. “If it’s not cost-effective, then we shouldn’t do it.”

Lockheed--which manages airports in Burbank, Albany, Newburgh, N.Y., and Columbus, Ohio, and the international terminal at Hartsfield Airport in Atlanta--says most privatization opportunities lie abroad. The company is doing work in several former Soviet republics and is seeking a management contract for the airport in Istanbul, Turkey.

But Lockheed is proudest of its operations in Toronto, where it manages the 1.4-million-square-foot, $400-million Terminal 3.

The idea for privatizing the Toronto airport surfaced in 1984 after the election of Conservative Prime Minister Brian Mulroney. Ottawa needed to expand facilities without increasing the federal deficit, and the Tory government, after several years of discussion, chose a Toronto developer to build and operate the terminal on land leased from the government.

Complaints of cronyism soon surfaced when it was revealed that the developer had hired lobbyists close to Mulroney to help its bid. The firm also got a $54-million government loan to cover operating deficits for 15 years. Competing bidders were not offered such a loan.

The government defended its choice, saying the winning bid was nearly twice as high as that of its nearest competitor. The government estimated the deal would bring taxpayers a minimum of $100 million over 30 years.

Construction began in early 1988 and was completed in three years--six months late because of two strikes. Still, it was completed in half the time the government would probably have taken.

The terminal, located in Mississauga, 25 miles west of downtown Toronto, has 29 gates, a shopping area, a 3,000-space parking garage and a 500-room hotel. “It’s a world-class terminal,” said Jim Mattich of Transport Canada, the federal agency that oversees the country’s 140 airports.

The government received $22 million when the facility opened, is paid a yearly rent and also collects a portion of any profits from retail and hotel operations.

But business has not met expectations. Since the terminal opened, passenger travel has been hurt by Canada’s prolonged recession and by terrorism fears in the wake of the Persian Gulf War. That in turn has taken a toll on commercial operations. Occupancy at the hotel has been low, and it was recently sold to Sheraton. Retailers complained of slow business, and several stores closed.

Still, the terminal gets high marks from consumers and airlines. Jerry Cance, general manager of the terminal for Lockheed, said it shows that a private firm can operate more efficiently than the government.

“I doubt you will ever see a cleaner, more frugally run building,” he said.

American Airlines said the new facility has helped increase its share of the market but that its operating profits also declined because of the higher costs at the new facility. “Our costs are four times as much,” said A.W. Pliszka, general manager of American Airlines at the airport.

Critics say that these higher costs ultimately will be passed on to passengers or taxpayers. This argument in part led to the decision to stop the privatization of the airport’s two older terminals.

The debate came to a head during the recent national elections, with the Liberals accusing the Conservatives of using airport development to reward their supporters.

A month before the election, the government approved a $540-million contract for the redevelopment and operation of the terminals with Paxport Inc., a firm controlled by a major fund-raiser for Mulroney. The company also recently hired two Tory lobbyists with strong ties to Mulroney and a former Tory Cabinet minister.

Because of financial difficulties, Paxport sought out a partner, and together they formed Pearson Development.

Then, as the national election approached, troubling financial details of the contract were disclosed. To get airline backing, it turned out, the developers agreed to drop rents 15%, costing taxpayers $54 million over the 57-year lease.

It was also revealed that the government agreed to provide the developers a $25-million loan for 10 years by deferring ground rents for several years. Further, if airline traffic drops, the operator can ask government approval for a passenger fee to help cover construction costs.

Opponents bristled at economic concessions offered by a government that relentlessly pushed free-market doctrine. Newly elected Liberal Prime Minister Jean Chretien ordered a review of the contract.

On Dec. 3, Chretien killed the privatization project after former Ontario province Treasurer Robert Nixon issued a report saying the “agreement simply does not serve the public interest.”

The report, commissioned by Chretien, said the privatization would have meant higher ticket prices, parking fees and concession charges along with sharply higher profits for the operators.

The government now is reviewing its options, but the decision is certain to delay a proposal to privatize the runways. Another result could be to turn operation of the airport over to a local authority, as the Canadian government has done elsewhere.

“It’s really a shame,” one airport official said. “This has been good for travelers and not bad for taxpayers. But the privatization became very convoluted because of the political situation.”

Price Waterhouse’s Steckler said politics is an unavoidable--and sometimes fatal--byproduct of privatization, particularly for major public works, like airports, or services that use lots of city workers, like garbage collection. It is certain to emerge in Los Angeles.

“It’s almost inevitable,” he said. “The battle gets posed by opponents in one of two ways: It’s just a way to bust the unions or it’s selling the family jewels.”