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Reason Foundation

Airport Policy and Security Newsletter #31

Topics include: DOT returns to congestion pricing; low-cost carrier terminals; advances in checkpoint technology; randomized security patrols; conflicting findings on airport privatization; and other news.

Robert Poole
January 1, 2008

In this issue:


DOT Re-embraces Airport Congestion Pricing

Last spring, the FAA's reauthorization proposal called for a 15-airport pilot program to test market mechanisms for allocating capacity at congested airports. Neither the House nor the Senate authorizing committees used the FAA's draft as its starting point, so the idea went nowhere in Congress. Last fall, when things came to a head over the summer's unprecedented delays at New York's JFK (with similar delays at Newark and LaGuardia), DOT Secretary Mary Peters launched a several-month discussion process with aviation stakeholders (the Aviation Rulemaking Committee—ARC), which DOT hoped would lead to support for slot auctions or congestion pricing. But thanks to all-out airline opposition and the at-best neutral stance on pricing by the Port Authority of New York and New Jersey, DOT appeared to drop the pricing idea in December. Instead, it announced the imposition of flight caps at JFK and EWR (similar to the "inte rim" cap still in effect at LGA) and said it would look into some form of auctioning, most likely just for any extra slots that came along.

But on January 14th, at a luncheon in New York City, Sec. Peters announced a new effort to make congestion pricing available at congested airports. She unveiled a notice of proposed amendments that would make two important changes to the DOT's airport rates and charges policy. First, it would permit airports to impose a "per movement" charge in addition to traditional weight-based runway charges. Second, because DOT has always required that revenues from runway charging cover only the allocated costs of the airside of the airport, the change would permit the inclusion of "advance funding" of future airside projects into that cost base. Thus, revised runway charges could produce more revenue than today's weight-based fees, as long as those monies were used for airside capacity expansion. (The docket number is FAA 2008-0036, accessible at www.regulations.gov, and comments may be submitted until March 3, 2008.)

In response, the alphabet groups (aviation trade associations, except those representing airports) made all the usual spurious claims about runway pricing that they'd aired during the ARC process, all of which were examined and refuted in the Reason Foundation policy study on airport pricing released in December (www.reason.org/ps366.pdf). What I find most egregious are claims that such pricing would amount to "a passenger punishment policy" (David Stempler of the Air Travelers Association) or "a tax which would result in increased ticket prices for customers without fundamentally addressing the real issue—congestion" (Betsy Talton, Delta). But the only airline passengers who would face significantly increased ticket prices are those on regional jets using those airports at their most-congested peak periods. In one example from the Reason study, with a $2,000 runway char ge at JFK during the late afternoon peak, a passenger on a 767 would face additional costs of $2, whereas one on a 35-seat RJ would face a $52 increase. Both econometric modeling and strategic simulation exercises show that airlines would shift most such RJs out of peak periods and in many cases "up-gauge" service to provide somewhat fewer frequencies with larger-size planes.

Assuming DOT puts some version of this revised airport rates and charges policy into effect following the comment period, their next step should be to create a pilot program to encourage congested airports to actually implement such pricing. That's what DOT did for congested roadways in urban areas, holding a national competition for Urban Partnership Agreements. The winners were the five metro areas (including New York City) that submitted the best plans to actually implement some form of pricing to reduce traffic congestion. Congress did not think up the UPA competition, and did not allocate any funds specifically for it. Instead, DOT targeted funds in several existing programs to be spent preferentially on those metro areas willing to take such a bold step. As former Clinton White House economist Dorothy Robyn suggested in a recent paper, DOT could give preference in NextGen implementation (RNP arrival and departure routes, ASDE-X installati on, ADS-B ground stations, etc.) to airports willing to use pricing to help solve their congestion problems.

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Low-Cost Carrier Terminals in the USA?

The old line about "where you stand depends on where you sit" has new relevance in U.S. airports. Southwest Airlines, the model for an entire generation of low-cost carriers (LCCs) around the world, is protesting recently announced plans by Austin-Bergstrom Airport to add a privately financed, no-frills terminal aimed at LCCs seeking lower terminal charges. All facilities in the new terminal will be common-use, and are described as being "Spartan." Southwest says that this sort of level of service is not acceptable, so it will stick with the main terminal. But it's trying to derail the airport's plan, which is aimed initially at attracting service from a relatively new LCC (VivaAeroBus) from Mexico (where such carriers are proliferating).

Before going into more details on Austin, here is some context. Over the last few years, as more LCCs have taken off in Europe and Asia, such carriers have expressed interest in moving beyond the secondary airports where they got their start. But the high terminal charges at the typical "full-service" terminals at main airports present a cost barrier to the no-frills LCC business model. So airports have started responding with no-frills terminals, generally lacking jetways, artwork, elaborate electronic displays, etc. Singapore's world-class Changi Airport and competitor Kuala Lumpur International each opened a no-frills LCC terminal in March 2006. According to an article in the December 2007 issue of Airline Business, Changi's new terminal thus far has service from two LCCs and Kuala Lumpur's from three. Next to open such a no-frills terminal were Bremen in September 2006 (Ryanair) and Marseilles in October 2006 (already hosting five LCCs). Another such terminal is under development at Lyon, with easyJet as its first airline. In Europe, legacy carrier Air France has raised legal objections to such terminals, thus far without success. And trade association IATA (International Air Transport Association) has expressed concerns over the charging mechanisms, fearing unfair cross-subsidization by the legacy carriers of facilities for LCCs.

Austin seems to have done its homework on its LCC terminal. First, it is using private finance to develop it, leasing the 40-acre site to GE Commercial Aviation Services (GECAS), which will develop and operate it via its AviatSolutions subsidiary. Airport director Jim Smith notes that such a ground lease is similar to ones long in place for fixed-base operators (for general aviation) and cargo operators. Terminal charges for the new LCC terminal will be based on recovering its costs. LCCs opting to use the new terminal will pay the same airfield charges as users of the main terminal, so it's hard to see where any cross-subsidy could be sneaking in.

The Austin terminal project with GECAS is a form of (partial) airport privatization analogous to what already exists with the privately financed, developed, and operated Terminal 4 at New York's JFK and the terminals at Orlando-Sanford, the very successful secondary airport in the Orlando area, serving mostly European charter airlines. It also bears some resemblance to the proposed Abraham Lincoln airport in Peotone, IL, in which a government authority would develop the air-side (runways, etc.) and the private sector the terminal and other land-side facilities.

It's painfully ironic to see Southwest, now all grown up to major carrier status, trying to prevent competition from a new generation of LCCs. A Wall Street Journal article by Scott McCartney (Dec. 12, 2007) showed that nearly all of the 20 least expensive airports (measured by the ticket price to fly one mile) are airports with significant LCC service. Competition works. Kudos to Austin-Bergstrom for its pro-competition approach, and shame on Southwest for its opposition.

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Advances in Passenger Checkpoint Technology

As I've been saying since the beginning of the TSA's implementation of passenger and checked-baggage screening, and repeated again last fall to National Defense magazine (October 2007), "Having a different standard of explosives inspection for checked and carry-on bags has always been a glaring inconsistency"—and still is. But there is encouraging progress to report, in the labs and at selected checkpoints.

First, the TSA has approved for live, in-airport testing several possible replacements for the very low-tech X-ray systems now in use at some 446 airports. The least expensive versions are multi-view X-ray machines made by L3, Rapiscan, and Smith's, at about $100K apiece. (The existing X-ray machines cost $35-60K.) Initial testing is under way in a few lanes at Albuquerque, JFK, LAX, and Reagan National airports. By taking two X-ray pictures from different angles, these machines give screeners more information about possible threat objects.

One of those machines is Smith's aTiX (Advanced Threat Detection X-ray). BAA, the privatized operator of seven UK airports, is installing about 200 of these to upgrade the checkpoint lanes at its UK airports. This move is in response to the UK government's ban on more than one carry-on since discovery of a liquid explosives plot in 2006. The aTiX machines are supposed to be able to detect explosives and liquids inside carry-on bags.

The high-end alternative to these two-view machines are 3-D X-ray machines that use computed tomography, just like their big brothers in the checked-baggage systems. Two different versions, from Analogic and Reveal, are in TSA airport testing at BWI, Cleveland, and Manchester. The great benefit to travelers from these machines is that they don't have to remove liquids or laptops from their carry-ons; the machines are apparently that good. But this performance comes at a high price, estimated at $350-400K apiece.

I don't have a figure for the total number of checkpoint lanes at all 446 TSA-screened airports, but a ballpark estimate might be 2,000 lanes. Thus, to outfit all 2000 with a $400K machine would cost $800 million, versus $200 million for the $100K machine. (This excludes installation and facility modifications costs.) Would airports, airlines, or passengers want to pay that difference to get rid of the hassle of taking their laptops and liquids out? I doubt it—and it's hard to justify making general taxpayers pay for this at a time of ongoing large federal budget deficits. But there is very likely a niche market that would pay a premium for this convenience: those who join registered traveler (RT) programs. Assuming these machines work as well as we all hope, they should be standard equipment when and as airports and RT vendors set up dedicated RT lanes.

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Randomized Security Patrols

In case you missed this in Newsweek (Sept. 28, 2007) or Aviation Daily (Dec. 20, 2007), a clever advance in premises security has been implemented at Los Angeles International Airport (LAX). Since we have to assume that terrorists scout out planned attack sites ahead of time, security patrols by armed officers would be much less useful if they followed predictable patterns. Scoping out those patterns is just a matter of patient observation and record-keeping by low-level operatives. So the ideal would be purely random patrolling. Yet this is something humans are not at all good at.

Fortunately, someone in a security program at the University of Southern California called CREATE (funded by the Department of Homeland Security) learned of a software program developed at USC's engineering school that could do something like that. After learning that the Los Angeles World Airports police department hoped to find such a product, a team at the engineering school went to work. Starting from Praveen Paruchuri's PhD dissertation modeling work in game theory, the team developed a system called ARMOR, incorporating detailed data about the airport's facilities and operations. After testing last summer and fall, ARMOR went into routine operation at LAX in November, generating randomized patrol schedules for the police officers. Current plans are to expand its use to the airport's bomb-sniffing dog patrols.

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Conflicting Findings on Airport Privatization

In Issue No. 27, I reported the results of a global study by consulting firm Arthur D. Little on the performance of recently privatized airports. Since the report was done for a client, it has not been published, but lead researcher Larent Delarue has given conference presentations and interviews, so we know the main findings. The study found that airports performed better after shifting to investor ownership or control, generating increased productivity via a combination of revenue increases and cost reductions.

Recently I have come across two studies that are in the open literature on airport privatization. One, in the Journal of Air Transport Management, looked at what difference the type of ownership structure made to productive efficiency and profitability—and concluded that "airports with a private majority ownership derive a much higher percentage of their total revenue from non-aviation services than any other category of airports, while offering significantly lower aeronautical charges than airports in other ownership categories," except for US airports. The researchers used a large database of 116 medium and large airports in North America, Europe, and Asia-Pacific. They did typical regression analysis to assess to what degree ownership form affects their various productivity measures. Since there were no privatized North American airports in the sample, their findings for the United States and Canada are more limited&mdas h;but it's interesting that they found no significant difference between such airports owned by airport authorities and those owned directly by cities or counties. On a global basis, they found airports with majority government ownership are "about one-third less efficient than the airports with a private majority." What they termed the most surprising finding was that airports with 100% single-government ownership were more efficient than public-private partnership (PPP) airports where the private-sector has a minority interest. They consequently recommend that when governments privatize, they divest at least a majority interest. ("Privatization, Corporatization, Ownership Forma and their Effects on the Performance of the World's Major Airports," Tae H. Oum, Nicole Adler, and Chunyan Yu, Journal of Air Transport Management, Vol. 12, pp. 109-121, 2006)

The other study used a smaller sample of five years of data on 22 airports: eight in the USA (all public), the seven UK BAA airports (all private), and the seven busiest non-UK EU airports (some public, some private). The researchers used a total factor productivity (TFP) model to test for a causal relationship between ownership type and TFP. They could find no significant relationship between ownership and TFP, but they did link productivity to the level of competition, choice of market, and extent of regulatory control. ("Productivity Analysis of Public and Private Airports: A Causal Explanation," by Bijan Vasigh and Javad Gorjidooz, Journal of Air Transportation, Vol. 11, No. 3, 2006)

I'm not enough of an economist to critique either paper's methodology, but I will point out that both papers used only a few years worth of data, and the second used a quite small sample of airports. One might expect productivity gains to increase with the number of years an airport is in investor hands, and with the much larger set of airports in the first paper, 20 years of data would allow pre- and post-privatization assessments to be carried out.

Still, it's useful to have studies like these, as airport privatization becomes an ever-larger factor in airport ownership and management.

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News Notes

Aviation Week Conference on Airport/ATC Demand Management. I will be speaking at Aviation Week's conference on this subject Feb. 13-14 in New York City. It is taking place at the McGraw-Hill Building, 1221 Avenue of the Americas, in midtown Manhattan. Among those speaking will be George Donohue (George Mason University), David Plavin (former head of Airports Council International and of Port Authority aviation operations), Dorothy Robyn (Brattle Group, formerly National Economic Council at the White House), Jeff Poole of IATA (no relation), and Victoria Cox of the FAA's Air Traffic Organization. More information and on-line registration at www.aviationweek.com/conferences. Or call 1-800-240-7645

Nifty Solar Project. I'm generally skeptical about the cost-effectiveness of solar electricity, but the Fresno Yosemite airport has come up with a project that may well make sense. Of the 25 acres of solar panels needed to generate the projected 40% of the airport's electricity needs, five acres will provide shade for rental car lots, a great benefit to car renters (think what Phoenix and Las Vegas could do with this idea!). The other 20 acres take advantage of the airport's approach zone, which must be kept free of occupied structures anyway. The two-megawatt plant, from WorldWater & Solar Technologies Corp., will cost $16 million but is supposed to save the airport $13 million over the next 20 years. That's putting all that flat airport land to good use.

Ad-Supported Checkpoints. Since 2005, a company called SecurityPoint Media has been testing, with TSA permission, ad-supported checkpoint equipment. Last summer TSA allowed the 11-airport pilot project to proceed for a full year. The company provides each airport with stainless steel tables for the checkpoint lanes, trays with paid advertising, and non-metallic carts for dispensing trays to the passengers. SecurityPoint makes its money from the ads, and the airports get the equipment and maintenance at no charge, and may get a share of the revenue. Airports taking part in the pilot include LAX, Jacksonville, Orange County (CA), San Diego, and Seattle. The first national advertiser in the program is online shoe retailer Zappos.com.

New Reason Transportation Colleague. Last month we added to our transportation staff at Reason Foundation Shirley Ybarra, former Secretary of Transportation of the state of Virginia, and once senior policy advisor to U.S. DOT Secretary Elizabeth Dole. In the latter position, she oversaw the passage and implementation of the landmark devolution of Washington National and Dulles airports from the FAA to the newly created Metropolitan Washington Airports Authority. Shirley is based in our Washington, DC office.

Poole Commentary on Airport Congestion Pricing. Aero-News did another interview with me this month, this time on airport congestion pricing and related issues. It was their special feature audio interview for January 23, 2008. Go to www.aero-news.net to listen in.

Correction re Auckland, NZ Airport. Last issue I reported on the $1.4 billion offer from a large Canadian pension fund for 40% of Auckland International Airport, expecting it to be accepted. Shortly after that issue went out, the airport company rejected the offer as too low. Besides publicly traded shares, the airport's shareholders include 23% owned by two city councils and other large stakes held by New Zealand's state pension fund and utilities investor Infratil.

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Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy


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