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Policy Study No. 178
July 1994

TABLE OF CONTENTS

I. BACKGROUND

A. Airport Basics

B. Airport Authority Study

C. Airport Master Plan

D. County's Fiscal Problems

E. Might Privatization of GMIA Be the Answer

II. OVERVIEW OF AIRPORT PRIVATIZATION

A. Airport Privatization Worldwid

B. U.S. Airport Privatizatio

C. The Legal Feasibility of Privatizing U.S. Airports

III. GMIA'S FUTURE CAPACITY REQUIREMENTS

A. Activity Forecasts

B. Capacity Expansion Needs

C. Financing Assumptions

IV. THE PRIVATIZATION ALTERNATIVE

A. Commercial Potential

B. Reduced Capital Expenditure

C. Valuation and Lease Payments

V. LEGAL FEASIBILITY

A. Power to Lease the Airport

B. Outstanding Bonds and Bondholders

C. Lease Payments to County Government

D. Property Taxes

E. Future Tax-exempt Revenue Bonds

F. Employee Relations

VI. IMPACTS ON STAKEHOLDERS

A. County Government

B. Airlines

C. Passengers

D. Airport Neighbors

E. Airport Employees

F. Conclusion

ABOUT THE AUTHORS

I.BACKGROUND

A.Airport Basics

General Mitchell International Airport (GMIA) is Wisconsin's principal air-carrier airport. With 2.19 million enplanements in 1992, it was the country's 56th-busiest commercial airport. GMIA is the principal airport not merely for Milwaukee but for all of southeast Wisconsin; some 78 percent of its enplaning passengers reside outside Milwaukee County. Although a small proportion of GMIA's passengers are transferring from one flight to another, 90 percent of all GMIA's enplanements originate at GMIA. Thus, the airport is considered an O&D (origin and destination) airport rather than a transfer hub airport.

GMIA is owned by Milwaukee County. It is operated as one of six divisions of the County's Public Works Department. GMIA is operationally self-sufficient, recovering from fees, charges, and grants sufficient revenues to cover operating costs and payments on County general-obligation bonds which have been used to finance airport expansion. In 1985, the principal airlines at GMIA signed 25-year contractual agreements obligating them to pay for terminal expansion projects through the year 2010. These contracts are of the type known as "residual-cost" agreements, in which the airlines obtain exclusive use of certain gates in exchange for agreeing to annual charges that will cover whatever portion of each year's airport costs (including debt service) is not covered by non-airline revenues.

Two major studies of the airport have been carried out in recent years: an update of the airport's master plan and an airport authority feasibility study. These documents provide an overview of the airport's operations, problems, and potential.

B. Airport Authority Study

In 1991 the state legislature directed the state Department of Transportation to commission a study of the feasibility of creating an airport authority to take over the operation of GMIA (and Timmerman Airport, a general-aviation reliever airport for GMIA). Motivating the study were concerns by some business leaders and public officials that under its current form of governance, as part of the County Public Works department, GMIA suffers from two ongoing problems: 1) Micromanagement: GMIA is subject to a degree of detailed oversight by County government that limits its ability to be run in a fully professional manner; and 2) Parochialism: having the airport governed solely by Milwaukee County sometimes fails to reflect the broader interests of the whole region served by the airport. These factors led to concern over the ability to move forward expeditiously with approving and implementing the new GMIA Master Plan (see below). Another concern was the ability of GMIA, under current conditions, to attract an international air carrier.

The study was conducted by KPMG Peat Marwick in association with Foley & Lardner and the Gerald Schwerm Co. The study documented the concerns of business and community leaders over airport governance, in particular finding that the County structure "is not well-suited to running the Airports as a business." But it concluded that there was strong opposition to Milwaukee County giving up control of the airport, either to an authority or to any existing entity (e.g., the State or an existing transportation agency). Moreover, it concluded that there is no consensus that an airport authority is the way to solve the airport's problems, and it failed to identify an existing or potential "champion" of creating such an authority.

C. Airport Master Plan

In 1988 the County hired Howard Needles Tammen & Bergendoff (HNTB) to update GMIA's Master Plan. An airport master plan is a federally required document that identifies future needs and guides airport development for a 20-year period. The Master Plan Update was published in April 1992. After lengthy public discussion, it was adopted by the County Board in September 1993.

The Master Plan makes projections of enplaned passengers from 1989 through 2009 and from them derives a projection of aircraft operations. In these projections, both a Baseline forecast and an Alternate forecast were developed, the latter assuming that GMIA shifts from being an O&D airport to a transfer-hub airport. Based on these activity forecasts, the Master Plan assesses the need for increased capacity of: 1) runways; and 2) terminals.

For runways, the limiting factor is instrument (IFR) operations in bad weather, under which runway capacity is more limited than under visual (VFR) operations in good weather. HNTB's projections showed that the IFR capacity would be exceeded (at peak hours) in 1998 under the Alternate scenario and by around 2004 in the Baseline scenario. The recommended fix was the addition of a parallel runway. After reviewing a number of alternate configurations, HNTB recommended the runway concept it termed C1. Also recommended were a number of short-term runway and taxiway improvements.

The recent expansion of Concourse D brought the airport's terminal capacity to 42 gates, sufficient for all expected needs during the short-term planning period. Based on accommodating the Alternate (transfer-hub) scenario's passenger forecast, HNTB recommended a several-phase terminal expansion, resulting in an increase to 60 gates by the year 2009 (and ultimate expandability to 80 gates).

These runway and terminal expansions, plus a variety of other improvements, were costed out, totaling $401.6 million, in three phases. Two alternate funding scenarios were then developed, one relying only on traditional sources (primarily bonding and federal grants) and the other supplementing these sources by a $3 passenger facility charge (PFC). Both scenarios were judged financially feasible by the Master Plan's authors.

The County Board deleted one proposed runway extension, but otherwise adopted the Master Plan as written, including the addition of a new parallel runway and the large-scale terminal expansion. The County has also announced plans to apply to the Federal Aviation Administration (FAA) for permission to institute a PFC program.

D. County's Fiscal Problems

Unlike most local governments in other states, county governments in Wisconsin generally do not make use of revenue bonds for projects (such as airport expansion) that can generate their own revenues. All airport expansions have therefore been financed largely with general-obligation (G.O.) bonds. But the County's growing bonded indebtedness has raised questions about the wisdom of continuing to issue larger amounts of G.O. bonds. A joint report issued in March 1994 by the city, county, sewage district, and school district found that the amount of debt of the five major units of local government doubled in the four years ending in 1992. The report also found that the County's debt level is expected to increase to more than $590 million by 1997, as it uses debt to finance 70 to 75 percent of $464 million in new capital projects from 1993 through 1997.

According to County Board Finance Committee chairman Richard D. Nyklewicz, the County's increased borrowing, along with state mandates and the state-imposed tax levy limit, led both Fitch and Moody's (two of the three principal rating agencies) to express concern last year about the County's fiscal health. Nyklewicz in January 1994 recommended that all future capital projects have 20 percent cash funding available before they be considered for bonding by the County.

An article in the Milwaukee Sentinel in April 1994 reported growing concern over limited County funds to operate current programs: "Complaints are rolling in over park maintenance, pools are breaking down and closing for repairs, and social service programs are begging for money." The article noted that the County has kept property tax increases below the rate of inflation for the past two years, which has limited funds for ongoing operations and maintenance. This situation has led to proposals (and debate) to sell the County-owned electric power plant, using the proceeds to retire debt and supplement operating budgets.

E. Might Privatization of GMIA Be the Answer?

Let us summarize key points from the preceding paragraphs. Milwaukee's GMIA, while self-supporting and competently run, is difficult to manage in a truly businesslike fashion under the current governance arrangements, and the alternative of an airport authority has not won meaningful support. To implement the planned expansions, and cope with future challenges such as attracting an international airline, a more professional form of airport governance would be highly desirable. In addition, County officials are concerned about continuing to increase the County's general-obligation bond indebtedness (on which the Master Plan's expansion plans depend).

Moreover, the County Executive, the Public Works director, and members of the County Board have expressed interest in privatizing one large existing County infrastructure asset, thereby converting a physical asset into a financial asset. The proposition which this study seeks to assess is whether some form of privatization might also be applicable to GMIA, thereby easing the County's fiscal problems (by providing a revenue windfall) while solving the aforementioned set of airport-related problems.

For example, if a world-class airport firm were to purchase or lease GMIA, it would bring a new level of professional airport management to GMIA. Marketing the airport would take advantage of the firm's breadth of international experience. And the design and timing of major runway and terminal expansions would be determined on the basis of commercial, bottom-line criteria. Depending on the privatization scenario, the County would receive either lease payments or a purchase price, thereby easing its fiscal problems.

Would privatization be financially feasible? Is it legally possible? And would the County (and other stakeholders) realize sufficient benefits from such a change to be willing to cede day-to-day operational control of GMIA to a private firm? What degree of policy control could the County retain to protect the public interest? These questions are addressed in the sections which follow. 

II.OVERVIEW OF AIRPORT PRIVATIZATION

A. Airport Privatization Worldwide

Airports are part of a worldwide trend in which governments are divesting a wide variety of enterprises to the private sector. Over the past nine years, some $388 billion of state-owned firms have been divested, in both industrialized countries (Western Europe, Japan, Australia and New Zealand) and the developing countries of Latin America and East Asia. Most recently, the former communist countries of Eastern Europe and the former Soviet Union have also begun large-scale privatization programs.

Though less-noticed than some types of privat-ization, airports have become part of the privat-ization agenda of more than 50 countries. The general pattern is for developed countries to sell all or a partial inter-est in existing airports or airport authorities, while developing countries make use of a long-term lease or franchise to have the private sector finance and develop either major additions to existing airports or entirely new airports.

Table 1: Airport Sales Worldwide
Country	Airport/City	Type	Status
A. Current Airport Sales Activity
Argentina	Buenos Aires	Sale or lease	Planned
Austria	Vienna Vienna	Minority (27%) Minority (18%)	Occurred Planned
Australia	Federal Airports Corp.-23 airports	Divestiture	Planned
Czech Republic	Pardubice	Divestiture	Occurred
Denmark	Copenhagen	Minority (25%)	Occurred
Italy	Rome Milan	Divestiture Divestiture	Planned Planned
Malaysia	Airports Corp.	Divestiture	Planned
New Zealand	Auckland	Divestiture	Planned
Panama	Commercial Airports	Sale or Lease	Planned
Peru	Lima	Divestiture	Planned
United Kingdom	BAA (7 airports) Liverpool East Midlands Prestwick Belfast Birmingham 24 local airports	Divestiture Majority Divestiture Re-sold Divestiture Majority Majority	Occurred Occurred Occurred Occurred Selection Process Planned Planned
B. Airport Sale Proposals Under Study
Belgium	Brussels Airport Terminal Corp.	Divestiture
France	Aeroports de Paris	Minority
Germany	Berlin Brandenberg Airport Hold. Dusseldorf airport Cologne/Bonn airport	Divestiture Divestiture Divestiture
Ireland	Aer Rianta (3 airports)	Divestiture
New Zealand	Christchurch airport Wellington airport	Divestiture Divestiture
Philippines	Manila Int'l Airport Authority	Divestiture
Russia	70 Aeroflot airports	Minority
Spain	Aeropuertos (5 airports)	Partial

Table 1 summarizes the current status of airport divestiture worldwide as of early 1994. The best-known case was the 1987 sale by the British government of British Airports Authority, the owner/operator of Heathrow, Gatwick, and Stansted airports in London and four other airports in Scotland. One hundred percent of BAA was offered to investors in the form of an initial public offering of shares; investors valued the company at $2.5 billion, and after five years in the private sector, the market value of BAA had increased to $4 billion. Under private ownership, BAA's operations became more efficient, its commercial (concession) revenues increased very significantly, and its capital spending increased (encompassing terminal expansions, addition of on-airport hotels, and the forthcoming development of a high-speed rail line from Heathrow to central London).

More recently, Austria and Denmark have sold part-interests in the Vienna and Copenhagen airports, respectively, and shares of both companies now trade on European exchanges. As noted in the tables, a number of other governments have announced plans to divest major airports (Argentina, Australia, Italy, Malaysia, New Zealand), and a number of others (e.g., Germany) are actively studying the idea.

The other common mode of airport privatization is the long-term franchise. In this case, ownership is retained by the government, but operational control is passed to a private firm for a long-term (25- to 50-year) period, in which the firm makes capital investments and manages the facility in a businesslike fashion. When this process is applied to an existing airport, it is termed lease-develop-operate (LDO). This type of privatization is being planned for Mexico's major airports, and is already under way for the two largest airports in Venezuela. When applied to new airport terminals or entirely new airports, it is generally called build-operate-transfer (BOT). As of early 1994, BOT projects to add new airport terminals were under way (or operational) in 12 countries, ranging from Albania to Canada to Vietnam. BOT projects to develop new airports were under way in five countries, the largest of which is Greece's $2-billion project to develop a new airport for Athens. Another 18 airport BOT projects were being considered in 14 countries.

Governments are turning to the private sector in airports for several reasons. A shortage of funds to ensure timely airport expansion and modernization is one principal reason in most countries; this may be due to overall fiscal problems or to limitations on the ability or willingness to issue additional debt. A second factor is a widespread trend toward "reinventing" and restructuring government, to focus more on its core functions and turn over commercial-type functions to the private sector. A third reason is the growing popularity of the commercial model of airport management (as opposed to the more traditional public utility or public service model). This model promises a higher level of services to passengers and a more robust and financially successful airport operation. Because of the general constraints imposed on government entities (civil service, procurement regulations, etc.), it is generally considered more feasible to implement the commercial model via a private-enterprise entity than within a government agency. A fourth factor is the success of the early cases of airport privatization, such as BAA and Toronto's BOT international terminal.

B.U.S. Airport Privatization

During the past five years there has been considerable discussion of airport privatization in the United States, but not very much action. In 1989 Albany County, New York attempted to sell its airport to a private consortium, but the Federal Aviation Administration (FAA) raised objections regarding the legality of the transaction, given the airport's grant agreements with the FAA. After much discussion and negotiation, the County opted for a management contract with one of the leading airport-management firms.

A number of other public officials have raised the issue of selling or leasing specific air-carrier airports in recent years. Among those which have been the subject of discussion and/or study are Atlanta, Baltimore, Boston, Indianapolis, Los Angeles, New York's Kennedy and LaGuardia, Philadelphia, Rochester, Syracuse, and Worcester. Governors, mayors, and other officials have expressed strong interest, while airlines have generally (but not always) expressed opposition. The FAA, and its parent agency, the U.S. Department of Transportation, continue to study the issue and have promised a policy statement on airport privatization since 1990, but one has yet to be issued.

Meanwhile, two forms of airport privatization are already in operation in the United States. A number of small and medium-size commercial airports are operated by private firms, on short- to medium-term (typically five years or less) management contracts. Among the airports operated in this manner are Albany N.Y., Burbank Calif., Republic N.Y., Rickenbacker Ohio, Stewart N.Y., and White Plains/Westchester County N.Y. Most recently Indianapolis has announced plans to issue a request for proposals (RFP) for the long-term lease or contract management of its airport system.

The other extant form of airport privatization is the long-term lease. Three general-aviation airports (Bader Field, Morristown, and Teterboro), one cargo airport (Rickenbacker), and one air-carrier airport (Atlantic City) are currently leased to private operators on a long-term (up to 99 years) basis.

The two major U.S. airport firms are Johnson Controls World Services and Lockheed Air Terminal. As shown in Table 2, of 11 U.S. airports leased to or managed by private firms, these two firms are the operator of all but one. But although these firms are the current U.S. leaders, they would probably not be the only bidders should Milwaukee proceed with privatization. Indianapolis received eight responses to its January 1994 request for qualifications. Among the other firms responding were England's BAA, AMR Consulting Group, and Aeroports de Paris.

C.The Legal Feasibility of Privatizing U.S. Airports

Under the Airport & Airway Improvement Act of 1982 and subsequent amendments, the FAA makes grants to air-carrier and general-aviation airports. Air-carrier airports receive entitlement grants based on a formula related to annual enplanements. They and other airports may also apply for discretionary grants for specific projects, in competition with other airports. The 1982 Act permits discretionary and noise-related grants (but not entitlement grants) to be made to privately owned airports operated on a for-profit basis.

Airports accepting federal airport grants (generally known as Airport Improvement Program grants, or "AIP grants") must sign contractual "grant agreements" with the FAA. The terms of those agreements require that the airport in question be open to all users on a nondiscriminatory basis, that airport charges be fair and reasonable, and that "all revenues generated by the airport" must be used only for airport (or airport-system) purposes. It is also well-established that the nexus of FAA control over airport access, charges, and other economic (as opposed to safety) issues lies in the grant agreements, each of which has a 20-year duration. In other words, if an airport were to forego AIP grants, the FAA would have no economic regulatory control over it.

The legal feasibility of privatizing an existing airport via sale or lease was enhanced by President Bush's Executive Order No. 12803 (issued in April 1992). This order is intended to remove federal barriers to the sale or lease of infrastructure facilities, including airports, by state and municipal governments. It directs the relevant federal agencies which have made grants (e.g., the FAA) to approve requests by such governments to sell or lease such facilities. The only conditions attached to such transactions are that: 1) the proceeds from the sale or lease be used in accordance with the provisions spelled out in the Order; and 2) that some sort of mechanism (either market, contract, or regulatory) be in place to ensure that the facility continues to be used for its original purpose and that user charges will be structured so as to protect users from abuse.

The sale or lease proceeds must be used as follows: The first claim on the proceeds is for the government owner of the facility to recover its original investment in the facility, including any transaction costs; these funds may be put into its general fund. If there are funds remaining, the second claimant is the federal government, which is entitled to recoup a portion of previous federal grants to the facility (the full amount less accumulated depreciation based on IRS accelerated depreciation tables). If there are still funds remaining, the final portion of the proceeds must be used by the municipality or state only for investment in other infrastructure or for reducing debt or taxes.

Do these provisions, along with existing law, provide clear legal authorization for privatizing GMIA via sale or lease? This question was addressed in connection with the proposed privatization of Los Angeles International Airport. As part of a major study of this issue commissioned by the City of Los Angeles, the law firm of Skadden Arps prepared a detailed legal memorandum on the issue.

The Skadden Arps memorandum concludes that a transfer of the airport to a new owner is permitted under existing federal law (i.e., prior to the Executive Order), and that private parties are eligible to be such owners and to receive AIP grants (as noted above). It also concludes that the City would be entitled to use the proceeds from a sale for general purposes, because the term "airport revenues" should be understood to mean operating revenues, not the proceeds from an asset transaction. This would be consistent with: a) the legislative history of the 1982 Act; b) accounting definitions; and c) the FAA's own handbook, which states that "Airport revenue does not include proceeds from the sale of real property owned by the sponsor."

With respect to a long-term lease of the airport, the memorandum notes that the FAA Compliance Manual already provides for the lease of entire airports. Not noted by Skadden Arps is the fact that lease payments being made by private lessees in the case of airports such as Atlantic City are going "off the airport" to the general funds of the underlying government owners. The memorandum also notes a 1991 Justice Department opinion regarding a proposed lease of Albany airport, in which the Department of Justice assumed that lease payments were "airport revenue" but could still be used for general-fund purposes to the extent that they represented a recovery of the local government's original investment in the airport. But it notes that the 1992 Executive Order may supersede this opinion.

In its overall conclusion, Skadden Arps states that "a sale or long-term lease of LAX to the private sector could be structured consistent with existing federal airport laws and regulations. In the wake of the President's Executive Order, there is even greater reason to believe that such transactions can be accomplished, should the City wish to pursue them." That conclusion would apply equally well to Milwaukee's GMIA.

III. GMIA'S FUTURE CAPACITY REQUIREMENTS

This section reviews the forecasts and requirements estimates contained in the Master Plan, in two respects. First, it takes account of actual data for the three years 1991, 1992, and 1993 since the Master Plan's analysis was completed, to see how close the actual outcomes are to the plan's forecasts. Second, it attempts to review the proposed investments in added capacity from a private-sector, commercial point of view.

A. Activity Forecasts

The Mater Plan begins with a forecast of regional employment, based on projections by the Southeastern Wisconsin Regional Planning Commission. As depicted in Figure 1, the projected levels appear reasonable, though some-what optimistic; the projected numbers are reasonably close to the Reason Foundation's straight-line projection based on a least-squares regression of the historical data points from 1975 through 1992

.The second element is the Master Plan's equation relating air carrier passenger originations at GMIA to regional employment. Figure 2 shows the historical data from 1972 through 1993, together with the Master Plan's two alternate projections. Projection (a), which assumes that transition effects of airline deregulation and the Northwest-Republic merger fade away during the forecast period, appears to be the more reasonable of the two, given the strong growth of originating traffic during the past decade (apart from the 1991 dip due to the Gulf war and the recession).

To obtain total air carrier passenger enplanements, we must add figures for connections (hubbing passengers who fly in on one plane and transfer to another).

The historical data for connecting passengers are depicted in Figure 3, which also shows the Master Plan's two alternate projections. For connecting passengers, baseline version (b) is described as being based on the continuation of historical trends, while the alternative version (a) assumes the establishment of a transfer hub at GMIA.

These projections clearly depart from reality. While the Master Plan's baseline (b) projection assumes that connecting traffic constitutes 25 percent of all enplanements, the actual level for the past decade has averaged only 11 percent. In fact, the merger of Republic into Northwest in 1984 eliminated the former's quasi-hub at GMIA, and there is no sign of any other carrier seeking to re-establish such a hub. Moreover, a number of airline consultants note that the popularity of hubs among airlines is falling. For example, Michael Boyd of Aviation Systems Research Corp. predicts that in the next four years, the number of hubs will decrease from 32 to 28.

A least-squares regression of 1985-1993 connecting passengers produced a third alternative projection, which we have labeled (c) in Figure 3. This would appear to be a more reasonable basis for projecting this portion of future enplanements, and we have used it in subsequent calculations.

Besides air carriers, the other main component of enplanements is passengers on commuter airlines. As shown in Figure 4, in this case the Master Plan correctly identified the strong upward trend in commuter activity, which was reinforced by the 35-percent growth experienced in 1993. All indications are that this strong upward trend in commuter service will continue, as forecast by HNTB.

Having established enplanement forecasts, the Master Plan then uses estimates of future aircraft size (seating capacity) and load factor (fraction of seats filled) to project the average number of passengers on each departing aircraft (enplanements per departure). Those numbers appear to be reasonable. Using those numbers, and the previous projections of enplanements, the Master Plan derives the projected numbers of aircraft departures, both baseline and alternate.

Because of the significant over-estimate of connecting passengers, noted above, we have recalculated the Master Plan's projections of departures, using HNTB's projection (a) of originating passengers and our own projection (c) of connecting passengers, together with the enplanements per departure forecast from the Master Plan's Table 4-20. The results are presented in Table 3. As a point of comparison, the year 2009 figure in Table 3 of 3,061,492 enplanements is 86 percent with HNTB's baseline forecast of 3,561,199 and only 54 percent of their alternate forecast of 5,626,984 enplanements. Likewise, the 2009 figure for aircraft departures in Table 3 of 34,438 contrasts with HNTB's baseline forecast of 40,058 and alternate forecast of 63,296.

TABLE 3: REVISED AIR CARRIER ENPLANEMENTS & DEPARTURES
Year	Enplanements (a)	Originations Connections (c)	Total	Departures	Enplanements per Departure
1992 (actual)	1,673,070	183,443	1,856,513	65.9	28,172
1997	1,939,545	210,000	2,149,545	74.4	28,892
2002	2,271,484	225,000	2,496,484	80.1	31,167
2007	2,623,721	235,000	2,858,721	86.3	33,125
2009	2,813,492	248,000	3,061,492	88.9	34,438

Since air carrier operations are only part of total airport activity, Table 4 provides a revised summary of the Master Plan's forecasts of all enplanements and aircraft operations (where operations equals twice the total of departures, i.e. one takeoff plus one landing). The revised numbers for air carriers have the most impact on enplanements, since air carriers account for the large majority of all passenger activity. They have somewhat less impact on total aircraft operations, since the majority of operations are non-air carrier, especially general aviation, commuter, and air cargo. The implication of Table 4 is that the requirements in the Master Plan for terminal expansion have been overstated, while runway needs may be closer to the Master Plan's forecast.

To pursue this question further requires moving beyond annual figures. The Master Plan examines the average daily activity in the peak month (ADPM) and during the peak hour. Table 5 uses the revised figures for air carrier enplanements and aircraft departures from Table 3, along with the assumptions about peaking from the Master Plan, to calculate revised figures for daily enplanements and departures during the peak month (which at GMIA is March). It then does likewise for the peak hour, again using the same peaking assumptions as the Master Plan. Because HNTB has assumed a gradual decrease (between 1988 and 2009) in the fraction of enplanements and departures that occur in the peak, the number of peak-hour departures actually decreases slightly through 2007 (from 9.9 to 9.0).

\TABLE 4 REVISED SUMMARY OF FORECASTS
	1992	1997	2002	2007	2009
Enplanements
Air Carrier	1,856,513	2,149,545	2,496,484	2,858,721	3,061,492
Commuter	270,152	364,942	475,503	606,875	669,080
Non-scheduled	82,114	90,660	100,097	110,515	114,980
	2,208,779	2,605,147	3,072,084	3,576,111	3,845,552
Aircraft Operations
Air Carrier	56,344	57,784	62,334	66,250	68,876
Commuter	31,596	39,242	48,770	58,920	63,722
Non-Scheduled	994	1,096	1,212	1,338	1,392
Cargo	10,572	13,947	16,490	19,640	21,058
Gen. Aviation	97,102	88,922	85,392	82,012	82,217
Military	5,517	5,517	5,517	5,517	5,517
	202,125	206,508	219,715	233,677	242,782

Table 6 presents similar figures for commuter enplanements and depar-tures, with all figures drawn directly from the Master Plan (except for peak-hour aircraft departures, which have been calculated from those figures). Despite the slight increase in average commuter aircraft size over the planning period, the large growth in activity leads to a doubling of peak-hour aircraft departures, from 6 to 12, by 2009.

TABLE 5: REVISED AIR CARRIER PEAK ENPLANEMENTS & DEPARTURES
	Average Day Peak Month		Peak Hour
	Enplanements	Aircraft Departures	Enplanements % of Daily		Aircraft Departures % of Daily
1992	6,049	76	15.6	944	13.0%	9.9
1997	7,003	78	14.2	994	11.8%	9.2
2002	8,134	84	13.1	1066	10.9%	9.2
2007	9,314	90	12	1118	10.0%	9.0
2009	9,974	93	12	1197	10.0%	9.3

TABLE 6: REVISED COMMUTER PEAK ENPLANEMENTS & DEPARTURES
	Average Day Peak Month Enplanements Aircraft Departures		Peak Hour Enplanements Aircraft Departures
1992	1,040	61	123	6.0
1997	1,405	76	166	7.5
2002	1,831	94	216	9.2
2007	2,337	113	276	11.1
2009	2,577	122	304	12.0

B. Capacity Expansion Needs

Chapter 5 of the Master Plan seeks to derive runway and terminal expansion needs from the activity forecasts in its Chapter 4.

Airfield (runway/taxiway) capacity is defined principally in terms of the number of aircraft operations that can be accommodated during the peak hour. Under good-weather (VFR) conditions, capacity is significantly greater than under bad-weather (IFR) conditions. As the Master Plan notes, GMIA operates in IFR conditions about 20 percent of the time—about one and a half days per week. The present IFR capacity is 57 operations per hour. As of the time the Master Plan was written, current peak-hour operations averaged between 40 and 45, which is 70-80 percent of IFR capacity. Under HNTB's baseline forecast, peak-hour IFR operations would reach 57 by around 2004; under the (unrealistic) alternate (hubbing) scenario, that level of operations would be reached by 1998.

TABLE 7: VFR PEAK-HOUR OPERATIONS (Departures X 2)
	1992	1997	2002	2007	2009
Air Carrier	19.8	18.4	18.4	18.0	18.6
Commuter	12.0	15.0	18.4	22.2	24.0
Non-sched.1	1.0	1.0	1.0	1.0	1.0
Cargo2	1.2	1.6	1.9	2.2	2.4
Gen. Av.3	22.2	20.3	19.5	18.7	18.8
Military4	0.6	0.6	0.6	0.6	0.6
VFR Operations	56.8	56.9	59.8	62.7	65.4
VFR Capacity	115-119	115–119	115–119	115–119	115–119

Notes: 1 6 Flights/day during winter months/max. of one per peak hour 2 Yearly total divided by 365 days divided by 24 hours		3 Yearly total divided by 365 days divided by 12 hours 4 Same as 2

TABLE 8: IFR PEAK-HOUR OPERATIONS
	1992	1997	2002	2007	2009
Air Carrier	19.8	18.4	18.4	18.0	18.6
Commuter	12.0	15.0	18.4	22.2	24.0
Non-sched.	1.0	1.0	1.0	1.0	1.0
Cargo	1.2	1.6	1.9	2.2	2.4
Gen. Av.*	6.2	5.7	5.5	5.2	5.3
Military	0	0	0	0	0
	40.2	41.7	45.2	48.6	51.3
IFR Capacity	57	57	57	57	57

Tables 7 and 8 present our revised forecasts of peak-hour operations under VFR and IFR conditions, respectively, using the assumptions noted and the peak-hour figures for air carriers and commuters from Tables 5 and 6. As can be seen, neither VFR nor IFR capacity limits are exceeded through the year 2009. Table 9 summarizes total annual aircraft operations with the revised forecast, compared with the Master Plan's two alternatives, and Table 10 repeats this comparison for peak-hour IFR operations.

To permit continued growth of GMIA beyond the point where 57 IFR operations per hour occur will require additional runway capacity, as the Master Plan points out. And its analysis of a variety of alternatives, leading to the choice of the C1

parallel runway, appears to be sound. But the runway C1 capacity increase to 110 IFR operations/hour is more than twice what is actually needed by 2009, according to our revised forecast.

The Master Plan recommends that GMIA acquire land well before the runway itself is needed, to preserve the future option to build the runway. Land acquisition for this purpose is proposed for both the intermediate-term (1996–2001) and long-term (2002–2009) periods; some $58 million is proposed for the intermediate period for land acquisition.

Based on the revised operations forecasts developed in this report (which reflect the great unlikelihood of GMIA becoming a transfer hub airport), deferring construction of the new parallel runway until after the end of the long-term planning period (2009 or later) would appear to be the most prudent course. Acquisition of the land to preserve this option should take place during the intermediate or long-term period.

Terminal requirements are based on peak-hour passenger flows. The Master Plan's derivation of required terminal facilities is flawed in two respects. First, it notes but does not take into account the extent to which short-term deficiencies have been remedied by the expansion of Concourse D, noting only on its requirements tables that "Concourse D expansion completed after the inventory element of this update satisfies much of this need." Unfortunately, "much" is not quantified, so it is difficult to estimate how much of the short-term expenditures recommended are no longer necessary. 

TABLE 11: NPLANEMENTS COMPARISON
	Forecast
	RF Revised	MP-Baseline	MP-Alternate
1992	2,208,779	2,344,895	2,544,194
1997	2,605,147	2,910,596	3,364,920
2002	3,072,084	3,450,749	4,400,948
2007	3,576,111	4,038,386	5,964,832
2009	3,845,552	4,345,259	6,411,044

Far more serious is the fact that throughout Chapter 6, terminal (gate) requirements are based on the Alternate scenario (which assumes a transfer hub operation at GMIA), rather than the more likely Baseline scenario—or our Revised scenario, which is slightly more conservative. Tables 11 and 12 compare our forecasts with those of the Master Plan, making clear that the Master Plan's program of terminal expansion is based on accommodating 6.4 million annual enplanements by 2009, when the actual number is likely to be 3.8 million. Likewise, the peak-hour enplanements in 2009 are likely to be around 1200, rather than the 2559 on which the terminal expansion plans are based.

C.Financing Assumptions

The discussion in the previous section has sought to demonstrate that the Master Plan has programmed two

TABLE 12: PEAK-HOUR ENPLANEMENTS COMPARISON
	Forecast
	RF Revised	MP-Baseline	MP-Alternate
1992	944	1,008	1,153
1997	994	1,139	1,458
2002	1,066	1,222	1,826
2007	1,118	1,294	2,386
2009	1,197	1,388	2,559

major expansions for the next 15 years which are unlikely to be needed in that time frame: the addition of a parallel runway to increase peak-hour IFR capacity from 57 to 110, and the expansion of terminal capacity to 68 gates (from the present 42). These decisions stemmed from an overly optimistic projection of connecting passengers in both the Baseline and Alternate forecasts used in the Master Plan, especially the latter.

Hence, the projected $401.6 million in capital expenditures is significantly more than is actually required. A bottom-line oriented airport management firm would be expected to develop new capacity only when and as it is required, and as can be justified by what are referred to as "investment-grade" traffic forecasts. Although the County's declared policy at present is to develop new capacity only when justified by increased traffic levels, there is no guarantee that a future County Board would stick with this approach, as opposed to a Denver-type "if we build it, they will come" philosophy. A long-term lease would provide the taxpayers with contractual protection against unwise future decisions, because such decisions would be against the firm's economic interests.

It is just as well that the required capital expenditures turn out to be less than what is projected in the Master Plan, since the proposed funding plan also makes some assumptions that might not be justified. The Master Plan's Table 9-6 summary, assuming the imposition of PFCs (as agreed to by the County Board), relies on federal grant funds for nearly one-third of the total capital spending program. Federal airport grants are of two types: entitlement and discretionary. The former are allocated by law in accordance with a formula based on enplanements. Since we expect actual enplanements by 2009 to be only 88 percent of the Master Plan's Baseline amount, entitlement funds would be 12 percent less than shown. More problematical is the Master Plan's assumption of $87.7 million in discretionary grants over the next 15 years. Over the past eight years (1986 through 1993), GMIA received a total of $8.2 million in discretionary grants, an average of $1 million per year. While it is conceivable that GMIA could obtain the projected $87.7 million in discretionary grants over the next 15 years, that would amount to a sixfold increase in the level of such grants. GMIA will be competing with numerous other airport expansion projects during this time frame; hence, that magnitude of grant funds cannot be safely assumed to be available. 

IV.THE PRIVATIZATION ALTERNATIVE

Under the status-quo approach, GMIA will continue under tight day-to-day oversight by County officials, reducing its ability to adopt businesslike management approaches. And the County will continue to experience fiscal problems, even if the airport remains fully self-supporting. And should a future County Board pursue too-rapid expansion of GMIA, as programmed in the Master Plan, County taxpayers would be put at risk to make payments on the new G.O. bonds issued to pay for a portion of this expansion.

Privatization offers an alternative scenario. Under this approach, the airport would be leased to a professional airport firm for a term of 25 to 30 years. The firm would make lease payments to the County, and the leasehold interest could become part of the County's tax base. Thus, one or two new revenue streams (lease payments and possibly property taxes) would be added to County coffers. The County would retain overall policy control, via the terms incorporated into the lease agreement. But day-to-day management would be delegated to the airport firm's professional managers.

New capital expenditures would be proposed by the firm and carried out by them, following County approval. Financing would continue to involve tax-exempt bonds, with a probable shift to revenue bonds backed solely by airport revenues, thereby shielding taxpayers from the risks of unwise development projects.

The remainder of this section fleshes out this concept in more detail.

A.Commercial Potential

Would a private operator be able to increase revenues and reduce costs at GMIA by enough to afford lease payments and property tax payments to the County, and still be able to make a profit (on which it would have to pay state and federal corporate income taxes)?

1.Cost Savings

Private firms have taken over the operation of numerous government services and facilities in the United States in the past 10 years, including convention centers, data processing centers, sports arenas, and wastewater treatment facilities. In addition, the major British airports have been privatized, as noted in Section II. We therefore have some basis for estimating cost savings generated by increased efficiency. A 1993 paper by John Hilke summarizes scores of empirical studies of cost-savings. In most cases, these savings have ranged from 10 to 50 percent, either on a before-after basis or in terms of side-by-side comparisons of similar operations.

For example, late in 1993 Indianapolis signed a five-year management contract for the operation and maintenance of its two advanced wastewater plants. The contract will reduce the projected operating budget by 40 percent, yielding savings of $65 million over the five-year period. Flint, Michigan last year contracted out its garbage collection service, cutting costs by 48 percent. There are many other such examples across the country.

In airports, BAA's experience with Heathrow and Gatwick is instructive. Productivity, as measured both by revenue per employee and passengers handled per employee, increased significantly as BAA became a commercial enterprise. Between 1983 and 1990, BAA's operating expenses per passenger handled decreased by 18 percent in real (inflation-corrected) terms. The privately developed and operated international terminal at Toronto's Lester B. Pearson International Airport is operating with 25 percent fewer employees than had been projected under government operation. And contractor-operated Burbank Airport has twice the level of enplanements per employee as comparably-sized Reno and Sacramento airports.

A major study of privately provided municipal services, carried out for the U.S. Department of Housing and Urban Development by researcher Barbara Stevens, offers insights into the kinds of factors that lead to cost savings thanks to higher productivity in privatized services. Stevens analyzed 10 different types of municipal services in Southern California, in each case obtaining data from one set of cities that produced the service in-house and a matched set of cities that obtained the service via private contractor. The study found that, on average, the private firms produced the same amount of output with 25 percent less input. Among the factors leading to these differences were that the private contractors, on average, provided less generous fringe benefits, made greater use of a mix of part-time and full-time staff, gave first-line managers the authority to hire and fire, used incentive systems, were less labor-intensive, and had a larger number of people supervised by each manager. Not generally found were either lower salaries or a lower quality of service in the private sector.

It is beyond the scope of this study to conduct a detailed analysis of the efficiency of GMIA's current operations. But on the basis of the foregoing, it seems reasonable to assume a minimum 10 percent saving on operating and maintenance costs for a privatized GMIA. The airport's operating budget (excluding depreciation and debt service) for 1994 is $22.18 million; this budget has increased at an annual rate of 10.3 percent/year over the past 11 years. With inflation accounting for perhaps half of that, the underlying number has increased about 5 percent per year. That would put the nominal 1995 number at $23.29 million; if that were cut by 10 percent thanks to privatization, the 1995 savings would be $2.3 million. These savings, too, would grow at a real rate of 5 percent annually; thus, by 2009, the savings would amount to $4.6 million per year.

2.Increased Revenues

The key to making airport privatization work is taking full advantage of the airport's commercial potential. As Clifford R. Bragdon, dean of the School of Aviation and Transportation at Dowling College, has noted, many large U.S. airports are "sleeping giants" with business potential to serve local and transient consumers. A busy airport can be viewed as a "satellite business district" with a distinct economic base of its own, Bragdon told Aviation Week recently.

Like most U.S. airports, GMIA is not fully taking advantage of its commercial potential. Its two principal sources of airline revenue—landing fees and space rentals (which constitute approximately half of operating revenues)—are generally constrained by the residual-cost use agreements which continue in force until 2010.

TABLE 13: GMIA REVENUE TRENDS (1983–1994)
Revenue	1983	1984	1985	1986	1987	1988	1989	1990	1991	1992	1993	1994 (proj.)	% Change
Landing Fees	$2,961	$3,093	$3,476	$4,078	$3,937	$3,685	$3,864	$4,045	$4,083	$4,592	$5,228	$5,332	80%
Space Rentals	3,922	4,753	6,035	7,032	8,050	9,082	9,014	10,349	7,501	8,963	10,819	11,065	182%
Parking Fees	1,817	1,859	2,605	3,256	3,459	4,746	5,913	6,494	6,445	7,114	6,800	7,000	285%
Car Rental	985	1,114	1,255	1,413	1,454	1,508	1,821	2,017	1,955	2,437	2,100	2,565	168%
Inside Concessions	1,004	994	1,024	1,121	1,179	1,178	1,236	1,234	1,272	1,299	1,305	1,168	16%
Airline Catering	180	179	214	221	215	277	348	482	439	417	456	430	139%
Other Concessions	71	77