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Deregulation Could Fund Face Lift for U.S. Airports

Wednesday, 18 May 2011 | 8:52 AM ET

Of the more than 19,700 airports in the United States, only one—in the town of Branson, Mo. — is privately run. The rest are owned and operated by local or state governments.

Aerial Photo of Branson Airport near Branson Missouri.
Photo: Kelly Trimble
Aerial Photo of Branson Airport near Branson Missouri.

This lack of a free market has some in the industry calling for a dramatic change — deregulation.

"The airlines are deregulated, but airports are more hamstrung under government regulations," says Debby McElroy, Executive Vice President, Policy and External Affairs at Airports Council International,an airport trade organization.

"Airports aren't profitable and have to follow rules on how revenues are spent. We think it's time for more economic freedom to better serve passengers," McElroy argues.

"I think the advantage of deregulation is allowing airports to utilize their own infrastructure for renovation," adds Harlan Platt, professor of finance at Northeastern's College of Business.

But not everyone sees a reason to put airports in a more competitive atmosphere.

"There's no need for deregulation," says Jeff Price, an associate professor at the Department of Aviation & Aerospace Science at The Metropolitan State College of Denver. "Airports are not really economically regulated, with the exception of grant money from the government. That money seems to do the job of protecting airport revenue and avoid overcharging the traveling public."

Since they're not subject to basic capitalism, how do airports survive?

Airports live off of airline tenant fees, passenger fees and revenue from privately owned parking and food concessions. Ninety percent of employees at airports work for private firms.

Most, if not all, security costs are handled by passenger and airlines fees and government tax receipts. And most, if not all, airports get funds from the Federal Aviation Administration for building improvements or runway extensions, while some cities or state governments issue bonds to do the same.

All income essentially goes back into maintaining airport operations, says Rick McQueen, CEO and president of the Akron-Canton airport in Ohio.

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"We survive by carefully managing our expenses, capital projects and staff size and operate without local tax revenue," says McQueen, whose airport is in the midst of a $110 million capital-improvement plan. "We also have to invest significantly in marketing so we can drive new passenger business to our airport. It's a volume business."

The biggest economic straitjacket for airport management now are what's called Passenger Facility Charges—charges to airline passengers—and how much they can be.

Created by the Aviation Act of 1990, PFC's can only be used by airports for development and expansion. They currently range from $3 to $4.50 per segment for up to four segments on a round trip ticket—an $18.00 maximum per round trip.

ACI's McElroy wants airports to have the ability to set their own PFC rates.

"The current PFC user rate fee ceiling has not beeen raised in 11 years," McElroy explains. "We're not looking for another fee but to replace the existing restrictions to give airports the ability to manage their own PFC programs."

But airlines, which were deregulated in 1978, don't seem anxious for airports to have that kind of economic freedom.

"We're opposed to raising the PFC because it is like a direct tax on passengers who already pay high taxes," says Sharon L. Pinkerton, senior vice president of the Air Transport Association, the airline industry trade group. "And airports are in far better financial shape than their airline partners."

Travel Dollars - A CNBC Special Report
Travel Dollars - A CNBC Special Report

Advocates for deregulation say airlines might be more concerned about themselves than passengers in a true free market system.

"Airlines would lose control of landing rights and they'd have to compete financially with other airlines for space," says Warren Adams, executive director of sales and marketing at LeighFisher, a consultancy group that's worked with airports on the deregulation issue. "They don't have to do that now."

There is a way for airports to try deregulation. The FAA and Congress established the Privatization Pilot Program in 1997, PPP, to let up to five public airports explore privatization—with certain restrictions—by selling or leasing themselves and use all profits for "airport purposes."

There are currently four airports approved for the program: Chicago Midway International Airport, Gwinnett County Briscoe Field in Georgia, Luís Muñoz Marín International Airport in Puerto Rico and Hendry County Airglades Airport in Florida.

Concourse of Midway Airport in Chicago.
Vito Palmisano | Getty Images
Concourse of Midway Airport in Chicago.

But Midway's effort has stalled, if not failed completely. A $2.5 billion deal reached with a Canadian development firm fell through in 2010 because investors could not secure financing, according to then Chicago Mayor Richard Daley.

It's unclear at this point if the city's new mayor, Rahm Emanuel, will pursue any other deal to privatize Midway.

Midway's problem highlights the difficulty for all airports thinking of deregulation, says Ross Taylor, a corporate finance partner at the law firm Kelley Drye & Warren.

"The risk of privatization is that you might not be able to generate revenue to cover costs," Taylor explains. "The downturn in the economy chilled investment with Midway. Would a city have to step in and take an airport over if it failed financially? You have to have profits for investors and improve the airport at the same time. Deregulation is not an easy step."

If airports are deregulated, everyone can expect to pay more, says research professor Lee McPheters, director of the JP Morgan Chase Economic Outlook Center at Arizona State University.

"Airports could have less government control and be less dependent on state and local governments to fill revenue gaps," McPheters says. "But if that's the case, it would require higher fees for airport users, including passengers and airlines and other airport-related businesses."

Survival under government regulation is something passengers and airlines can count on with airports, even in a down economy, says Roy Williams, an aviation strategic management consultant and former director of three major airports.

"Traffic may decline, infrastructure may age, but the safety nets under government programs and cost cutting on the operations side have kept U.S. airports solvent," Williams explains. "Not one has closed because of an inability to get funds."

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The debate over deregulation in the U.S. has been around since the first commercial airports were built in the 1920s and will continue, say analysts, as European countries like Spain, and Russia, are making efforts to privatize airports.

"If Europe and other areas have success with privatization, you'll see it getting more interest over here, especially if local and state governments, as well as Washington, have trouble coming up with the money for airports and see leasing land as a way to get money," says Ross Taylor. "Having cities get funds from airport privatization can have some appeal in these tough times."

Deregulation backers say it's unlikely airports will be set free economically anytime soon, but some sort of compromise would do for now.

"We'd like more airports to be available for the PPP program," ACI's McElroy says. "Looking forward, certain regulations would be appropriate, such as money earned staying at the airport and that airports can't discriminate against airlines as carriers."

Travel Dollars - A CNBC Special Report
Travel Dollars - A CNBC Special Report

McElroy admits any kind of victory will be hard won.

"It's a political battle in Washington and with the airlines," McElroy explains. "It took years for the airlines themselves to deregulate, so we know it's difficult. But we think we have a strong case for deregulation. and the time has come."