No. 3 April 1996
Is It Time to Let the Private Sector Run Our Airports?
Michael Bell is President of British Airports Authority, USA (BAA). Its parent company, BAA Plc, was once government owned, but is now a publicly traded company which owns and operates seven airports in the United Kingdom. In February, Mr. Bell addressed a meeting hosted by the Center for Civic Innovation. This is an edited version of his remarks.
Airport privatization works, although many competent people who work for airport authorities donít believe it. I know that because I used to be one of those people. And at that time we were terribly proud of what we did and over the years we had collected lots of statistical data to prove how well we were doing.
It was not until we were privatized that we actually realized how much better things could be. In fact, things got better immediately. We began to be able to take actions free from all the inhibitions that come with government supervision. We could do far more with fewer people. And we have been able to reduce costs to our customers, improve service for the passengers and generate profits for our shareholders every year since privatization. None of that is really very difficult to do. Itís just that governments arenít very good at it.
What is now BAA was originally part of a British government agency that ran both airports and airlines until Prime Minister Margaret Thatcher divided the company into two components and privatized each in 1987. In Great Britain we own and operate Heathrow, Gatwick, and five other airports. Here in the United States we have operated the food, retail and beverage concessions at Pittsburgh International Airport since 1991 and the entire airport system in Indianapolis since last October. We are in negotiations to purchase two Australian airports and one in Milan, Italy, and we run consulting offices in many parts of the world. Wherever we operate we are subject to government safety and economic regulations.
How the Private Sector Saves Money
Let me mention a few simple indicators of our success:
- In a largely subsidized industry we have been profitable every year since privatization.
- We have been able to cut costs by at least 30 percent wherever we have operated.
- Although we are handling an ever-increasing number of passengers, up 7.1 percent last year, in many areas we are achieving our best scores ever for customer service.
- We have been successful at tapping new sources of non-aeronautical income, with retail sales up 10 percent following a significant investment to expand retail space. Importantly, revenue from retail sales is now our single greatest source of income.
- We have consistently lowered the landing fees that airlines pay to use the airport.
Still, there are those who oppose privatization, and it is not only the airport authorities. In the United States there is often opposition from the airlines as well, although their logic is a little odd. The reason? Typically, airports in this country are not allowed to make a profit; any surplus revenue is divided among the airlines to reduce the landing fees they pay the airport in the coming year. So the airlines believe that maintaining the current ďclosed-loopĒ system is in their interests. But what they overlook is that the authorities currently running airports have no incentive to cut costs or increase non-aviation revenue. A private company, on the other hand, does have incentives to operate more efficiently, and can pass some of that savings onto the carriers.
I know it can be done, because we have done it. At first it was forced on us by Mrs. Thatcherís government, which insisted that we reduce landing fees by 1 percent, in real terms, in our first five years of operation. After we accomplished that, we were able to do even more, lowering the fees by 8 percent, 8 percent, 4 percent, 4 percent and 1 percent in years six through 10, respectively.
By the time we negotiated our deal in Indianapolis, we were confident enough that we guaranteed carriers a reduction of $32 million over the 10-year life of the contract. This promise made the airlines our allies. While they still do not like the idea of selling airports outright, our deal made a lot of sense for them.
Our deal also makes sense for municipalities, which want to cut costs and also improve service. Frankly, reducing expenditures by 30 percent is pretty easy to do. Most of the savings comes from reduced labor costs. At many airports there are simply too many people doing the same job.
It happens like this: Letís say an engineer is called out by an airline office because four light bulbs have gone out. The engineer inspects the situation and determines that the lights are indeed out. Instead of just replacing the bulbs, he tells the airline office person that heíll be back. He returns to his own office and fills out two formsóa work order and a supply requisition slipówhich he sends to an office upstairs. Sometime later the first form comes back approved. Still later he gets the second form, also approved. Only then does he return to the airline office and complete the job.
The bottom line is that what should take 20 minutes takes half a day. Similar things happen literally hundreds of times a day at most airports. We have the experience to address that problem immediately. That does not mean we have a policy of compulsory layoffs. In fact, we believe the people who can tell us best how to do a particular job are the people who are doing it. And, frankly, weíre lucky to be working in an industry thatís growing, so massive layoffs are not necessary. What we often offer those who stay with us is training, redeployment and a range of new possibilities that many had probably never thought about before.
A Better Way to Run Airports
Something else we understand is the importance of conducting good audits. Take a parking lot where money is handled by individuals. With no audit you can expect to lose about 40 percent of your revenue. With an average audit you lose 10 percent. An excellent audit can cut the loss to almost nothing.
Of course, municipalities across the country have told me that they can also undertake cost cuts, audits and other similar measures, and theyíre right in principle. But two obstacles stand in the way. First, government procedures are far more cumbersome than ours. So when the government undertakes a thorough audit it often ends up costing more than the savings it generates. Second, itís much easier to be expert in running an airport when you run more than one. We benefit from a variety of economies of scale, including those in resources, knowledge and experience.
Take gate leases. Typically in the U.S. the airline leases the gate, which means that it pays for it 24 hours a day, whether it is being used or not. In Europe, on the other hand, the gates are owned by the airports. An airline pays a usage fee when it needs the gate, and then another carrier comes along and uses the same gate. It allows the airport to get much higher turnover. Thatís obviously the formula we prefer to follow, and we know from experience how to make it work.
We also understand that itís in our interest to keep improving and expanding our facilities. We spend between $1.5 million and $2 million a day on infrastructure investment, and roughly the same amount on safety and fire prevention. We are developing a sophisticated system to screen and search checked baggage. This past year alone we added 75,000 square feet of retail space. We have begun work on the Heathrow Express, a $500 million joint venture with British Rail to build a high quality surface rail system between Heathrow and London. When it enters service in late 1997, it will transport 6 million passengers each year to and from the airport in just 16 minutes. And we have submitted an application for the construction of a new terminal at Heathrow to cater to the increasing number of travelers we expect in the next century. If we get the go-ahead, the first phase will be complete by 2002.
Give People What They Want
When we took over operations in Pittsburgh, we introduced a radical concept: We asked people what they wanted. We learned a great deal and decided to continue talking to our passengers to find out how we were doing and what we could do better. We now do half a million interviews a year at all our airports. If youíre using one of our facilities youíre likely to be button-holed by someone with a clipboard who asks you a lot of questions.
One of the things we discovered in Pittsburgh was that passengers were unhappy about airport prices. The retail outlets were charging 69 cents for a pack of gum when one could get the same pack at a store nearby for 25 cents. So we lowered the airport price to 25 cents. I am aware how trivial that sounds. But lowering prices on inexpensive items meant that people werenít mad when they were in our retail outlets and were more inclined to buy things. When we took over, passengers made an average of $2.50 in retail purchases. That figure is now up to almost $7. Total non-aeronautical revenues have risen from $23 million in 1991 to $66 million last year.
In Indianapolis passengers were extremely critical of the fact that shuttle buses to the parking lot, hotels and other destinations left from the upper level even though the baggage claim section was on the lower level. It meant people had to lug their bags upstairs. So we immediately changed the system, with two results. First, passengers no longer registered any unhappiness about the situation. Second, it unclogged the upper level and helped keep things moving.
From this commitment to service and efficiency, our company has seen a rise in every indicator of success: passenger volume, pre-tax profits, earnings per share and dividends to stockholders are all up significantly over the last three years. We are also expecting that airport bonds in Indianapolis will receive a higher rating in the very near future.
A Future for the Private Sector Airports
As you have probably inferred, privatization can mean several things, including an outright sale of an airport or turning it over to private management. In the United States we are far more likely to see the latter, chiefly because giving up municipal ownership also means giving up access to public funding and various tax breaks and subsidies that were part of the original financing package. There may come a time when people understand how much airports are being subsidized and decide to let the private sector run them on a for-profit basis. In the meantime, however, privatizing management can allow a city to get many of the benefits of complete privatization. And government can take control again if things donít work out.
Under our agreements, if we donít add value, we donít earn a cent. In fact, if we fail to improve operations, we lose money, because, as I mentioned, we are often willing to provide a guarantee. In Pittsburgh we have guaranteed a specified amount of retail revenue. If we come up short we take the hit; if we exceed the target we share the profits. In Indianapolis we guaranteed a cost reduction. Again, if we fail we take a hit; if we exceed the target we get a bonus payment.
Where does all this lead regarding Kennedy, LaGuardia, and Newark? While itís not for me to say that these facilities should be privatized, surveys say customers are not satisfied with what they are getting at these airports. It is important to remember that these airports are being run by good, competent people. But they are not equipped to understand the concept of privatization. We have to capture the hearts and minds of those in charge so that they understand that it really is possible to do better.