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Reason Foundation

Airport Policy and Security Newsletter #72

Rethinking airport funding, reforming small-airport subsidy program, GAO on tarmac delay rule

Robert Poole
October 14, 2011

In this issue:

Time to Rethink U.S. Airport Funding

Growing political concern about the fiscal condition of the federal government has prompted a flurry of activity by U.S. airports, calling for a fundamental rethink of traditional means of airport funding-in particular federal Airport Improvement Program grants and the federally-controlled local passenger facility charge (PFC).

The basic problem is that with the federal budget essentially out of control due largely to entitlement programs which Congress is thus far unwilling to tackle, there are increasing pressures to reduce the deficit by cutting back discretionary programs. That means all federal grant programs (such as AIP) are at risk, even though they may be largely funded by means of user taxes. The overall FAA budget in recent years has increasingly depended on general-fund support; as recently as 2007, the general fund provided under 16% of the FAA budget, but in FY2011 that percentage has grown to over 31%. If and when Congress cuts way back on general-fund support, AIP would likely be the "least-bad" candidate for cutbacks (as opposed to air traffic controller payroll or NextGen ATC modernization funding, the other two major budget categories).

Yet at the same time, the need for airport investment is huge. The World Economic Forum ranks U.S. aviation infrastructure 32nd in the world, behind that of Panama, Chile, and Malaysia. The Airports Council International-North America identifies some $80 billion worth of airport capital projects (while FAA puts the figure at a still sizeable $52 billion), implementation of which would go a long way towards improving airport capacity and quality. AIP, by contrast is about $3.5 billion per year.

Given the impending collision between reduced federal funding and large unmet airport investment needs, airport CEOs and the two major airport organizations-ACI-NA and AAAE-have been holding meetings to brainstorm major changes in how U.S. airports are funded. The main theme seems to be that it's high time-33 years after airline deregulation-to deregulate airports, too.  As ACI-NA President Greg Principato put it recently in Aviation Daily, "The financial regulatory framework under which airports operate dates from the days when the federal government told the airlines where to fly and how much to charge, and when someone [Richard M. Nixon] actually thought wage and price controls were a good idea."

Thinking bold thoughts, airport leaders are considering the following trade-off, for air-carrier airports: give up some or all AIP grants in exchange for decontrol of the level of PFCs. In August, for example, ACI-NA's Principato wrote to all 12 Senators and House members comprising the deficit-reduction Super Committee asking them to get the federal government out of setting the level of PFCs. (Principato calls ACI-NA's reform effort the "Moses initiative"-as in "let my airports go.") A group of 10 of the country's largest airports sent the Super Committee a letter on September 14th saying they would be willing to give up AIP entitlement funds in exchange for PFC autonomy. Sources tell me that several member airports wanted to go further, giving up all AIP funding if they got PFC autonomy. Leaders of 12 commercial airports in Texas met in Houston on Sept. 27 to discuss the same set of issues. In addition to PFC reform, they argued that Congress should make permanent the exemption of airport revenue bonds from the Alternative Minimum Tax. Aviation Daily (Sept. 30) reports that similar airport groups now exist in California, Florida, and New York.

Way back in 1990, in my first Reason Foundation policy paper on airport privatization, I analyzed FAA data on the 50 largest U.S. airports, comparing how much federal ticket tax revenue each generated in 1987 and the amount each received in 1987 AIP entitlement grants. Most of the largest airports (BOS, LGA, LAX, SFO, etc.) got back less than 12% of what they generated, compared with significantly higher rates of return at medium-size airports (Dallas Love Field got 42.5% back, Maui got 33.6%, Memphis 30.6%). In other words, the very airports that were most congested and providing the largest amounts of air travel services were getting short-changed by this sort of redistribution. But that tends to be the way the political process works.

Canada de-federalized its airports several decades ago, devolving nearly complete control to newly created local airport authorities. Instead of getting federal grants, each airport is free to set its own Airport Improvement Fee-essentially an uncapped PFC. The results have been significant improvements in airport capacity and quality, not a proliferation of "Taj Majal" terminals (as feared by U.S. airlines).

Conservatives and tax-cutters should welcome a deal that would significantly cut AIP in exchange for having the federal government butt out of telling locally governed airports how to fund their capital improvements. This is precisely the kind of devolution many of them are supporting when it comes to highways and transit.

Reforming the Essential Air Services (EAS) Program

As you will recall, the specific issue leading to the shut-down of much of the FAA in August was the House's inclusion in its short-term FAA funding extension of a modest cutback in the EAS subsidy program. It would have eliminated such subsidies for any airport less than 90 miles from a hub airport and for any whose per-passenger subsidy level exceeds $1,000. The latter applied only to Alamogordo, NM; Ely, NV; and Glendive, MT. The former would have terminated EAS at 10 airports, including Johnstown, PA and Athens, GA. The bill that ended the shut-down had the Senate grudgingly agree to the House amendment, but with the understanding that DOT Secretary LaHood would use his authority to waive the cutoff for the 10 airports within 90 miles of a hub. (For some reason, that provision allowed the three very high subsidy airports to be terminated.)

Last month, the American Bus Association and three public interest groups-Natural Resources Defense Council, Reason Foundation, and Taxpayers for Common Sense-released a study justifying a broader reform of EAS. Researchers from M.J. Bradley & Associates crunched the numbers on EAS and found that 38 of the 153 rural communities in the program are within 150 miles of a medium or large hub airport, for which bus service is a realistic alternative. Using data from current commercial bus companies, the analysts estimated the cost of providing the same level of service now offerred by EAS-subsidized airlines to those 38 communities and compared it with the cost of the subsidized air service. Overall, the total annual cost of those flights (taxpayer cost plus passenger fare) was $131.3 million, averaging $213 per passenger. The estimated cost of providing equivalent amounts of scheduled coach bus service was $43.4 million-about $70/passenger.

The study bent over backwards to be fair. Some19% of the estimated $70/passenger cost of the replacement bus trip accounts for the cost of the extra time spent on the journey, given that most of the bus trips would take somewhat longer than the airline trips they replaced. (The weighted average additional time is 43 minutes per trip.) The bus trip would also be more environmentally friendly. Replacing EAS trips with bus trips at these 38 airports would reduce CO2 emissions by almost 69,000 tons each year, with meaningful reductions in NO, HC, CO, and SO2, as well. And for many routes, the per-passenger cost of operating the bus would be less than the fare charged to the EAS airline passengers (which, of course, does not include the subsidy).  Many of the bus routes could be operated without subsidy.

If I had my druthers, EAS would be wiped out completely, as a silly waste of taxpayers' money-precisely the kind of political frivolity our nearly bankrupt federal government cannot afford. But since that does not seem likely, eliminating these 38 airports from the program in favor of scheduled bus service is the least that Congress should do, when it returns to the FAA reauthorization bill.

GAO Weighs in on Tarmac Delay Rule's Impacts

In September 2010 and again in March 2011, I reported on detailed analytical work by aviation analysts Darryl Jenkins and Joshua Marks to assess the likely impact of the U.S. DOT's tarmac delay rule. As you will recall, this new rule imposed a fine of $27,500 per passenger for any flight delayed on the tarmac for more than three hours. Jenkins and Marks presented a highly plausible case, drawing on a database of 10 years of airline flight activity, that the threat of those penalties would lead not merely to compliance with the rule but to a large increase in pre-emptive flight cancellations-and that the cost to airline passengers of those cancellations would be far higher than the savings to those spared 3+ hour delays.

The Government Accountability Office released its report on the subject early last month, bearing a typically innocuous title, "Airline Passenger Protections: More Data and Analysis Needed to Understand Effects of Flight Delays." (GAO-11-733, available at www.gao.gov) In a nutshell, the GAO analysis broadly confirms what Jenkins and Marks predicted. They found that the delay rule has, indeed, "nearly eliminated tarmac delays of more than 3 hours, declining from 693 to 20 incidents in the 12 months following the introduction of the rule in April 2010." But "the rule is also correlated with a greater likelihood of flight cancellations." In fact, GAO found that cancellations before a flight leaves the gate increased 24% in 2010 over 2009; cancellations during the first 60 minutes after push-back were 31% more frequent in 2010; cancellations after a flight had been on the tarmac between 61 and 120 minutes went up 214%; and cancellations after time on tarmac between 121 and 180 minutes went up by 359%. These sharp increases in 2010 are in contrast to a steady downward trend in cancellations from 2007 through 2009.

Since many factors could account for these changes in addition to the implementation of the tarmac delay rule, GAO used a logistic regression to analyze the data. Factors taken into account in the model included weather at the origin and destination airport, airline characteristics, and specific details of individual flights. The correlation with the delay rule in the various cancellation rates was found to be statistically significant at the one percent level.

Unfortunately, GAO did not do a benefit/cost analysis for the delay rule. Had they done so, they almost certainly would have found that the costs to travelers whose trips were disrupted by the 5,068 more cancellations in 2010 outweighed the costs incurred by those forced to endure long tarmac delays on 673 flights had the rule not been implemented. That's because with today's airline load factors approaching 90%, it can take 9 or 10 flights of equivalent size planes to accommodate those on a cancelled flight, and it may take several days before all those people can actually get onto one of those planes to get where they're going (assuming the trip still makes sense).

GAO also unearthed a few other interesting bits of information. For one thing, airports in rural communities are far more likely to be impacted by delays, cancellations, and diversions than larger communities. That shouldn't be a surprise, since when airlines have to make a choice, they will try to inconvenience the smallest number of customers, so flights on large planes to major destinations will get priority. Second, "DOT's data provide an incomplete picture of flight delay, cancellation, and diversion trends." GAO analysts found that more accurate and complete data are available from commercial database Flight Stats than from DOT's own database.

Third, the GAO report points out that the DOT's tarmac delay rule does not define the term "violation," making it unclear whether the $27,500 penalty per violation is per flight or per passenger. In a footnote the report notes that "DOT officials told us that, although they are not required to, they could issue guidance on their penalty structure as it pertains to the tarmac delay rule, but have chosen not to in order to maintain flexibility under their current authority."  In a free country, the rule of law is supposed to spell out clearly what is required, what is forbidden, and what the penalties are, so that individuals and companies can guide their behavior accordingly. If Congress is unwilling to overturn DOT's costly and ill-advised rule, the least they could do is to spell out precisely what a violation is and what the penalty per violation is.

The Return of Wayports?

Back in the 1990s, there was a flurry of interest in an airport idea called a "wayport." The basic idea was to build a connecting hub in an area with inexpensive land, so it could be built large enough for long-term growth and with little concern for noise impacts or other constraints on 24-hour-a-day operations. The trade-off was relatively low capital costs and 24/7 operations as an offset to the lack of a base of origin and destination (O&D) traffic. Promoters in various rural areas saw wayports as a potential pot of gold at the end of the rainbow, but none of their visions got off the ground.

I reflected back on those days when I read several reports about Pittsburgh International Airport's intention of adapting the wayport model to an O&D airport that has huge excess capacity due to US Airways having taken down what used to be its largest hub at PIT. The airport's CEO, Bradley Penrod, cites the major Fedex and UPS hubs at Memphis and Louisville, respectively, as inspirations, hoping to do for passenger travel what those airports are doing for air freight. His Capacity and Service Enhancement document (at www.flypittsburgh.com) outlines the congestion-relief benefits to airlines in the Northeast if they shifted some of their hub operations from JFK, EWR, LGA, and PHL to PIT. He suggests that those airports were not designed to handle high levels of connecting traffic, but PIT was, and invites airports doing connections at those hubs to give PIT a try.

I can think of a number of obstacles to making this plan work, but to be fair, let me also call your attention to two examples that are making use of the wayport concept today: Darwin and Dubai. The latter is already the world's third-busiest airport, and it's not due to O&D traffic. Situated in a low-population desert kingdom, Dubai International is the principal hub for fast-growing Emirates, which connects long-haul flights from all over the world through this airport. In July the airport announced a $7.8 billion expansion, and Emirates has 90 Airbus A-380s on order. Dubai International may be a special case, due to its location, but so far it seems to be succeeding as a wayport.

Picking up on this model is Australia's Darwin International, on Australia's very lightly populated north coast. Both Qantas and Jetstar have set forth plans to develop it into a long-haul and domestic hub. The airport aims to be the principal connecting hub for narrow-body flights between Australia and Southeast Asia. Jetstar has begun flights from Darwin to Manila, supplementing its routes to Bali, Adelaide, Melbourne, and Sydney. Darwin Airport CEO Ian Kew is talking with Qantas about service to Singapore. And the privatized airport has the support of major shareholder, Australian Infrastructure Fund. To be sure, Darwin is (at present) much smaller than Dubai International, but the wayport principle it is following appears to be much the same.

TSA Reauthorization a Much-Needed Development

This being the 10th anniversary of the hastily enacted legislation that created the Transportation Security Administration, it's appropriate that Congress step back and take a hard look at what has worked and what has not worked in this new federal agency. So I was glad to see that on Sept. 23rd, the House Homeland Security Committee announced the introduction of the "Transportation Security Administration Authorization Act of 2011," HR 3011. Its goal, according to the committee's news release, is to "streamline operations, eliminate redundancy, lower costs, and promote accountability." Those are all worthy goals, but from what I've seen of the bill thus far, I'm not convinced it will make the kind of fundamental changes that are called for.

Key provisions include a risk-based program at airport checkpoints (something the TSA seems to be finally getting under way), separate rules for screening children (also being started), an agency-wide review [by whom?] to identify ways to reduce costs and improve efficiency, new accountability and training requirements for Transportation Security Officers (TSOs), an air cargo advanced screening program, enhanced information sharing with the private sector, and elimination of redundant background check requirements for truck drivers. That's it?

I would hope for a much broader look at what has worked, what hasn't worked or isn't working, what is not worth the money being spent on it, and similar questions. Programs that appear to have very low bang for the buck-such as federal air marshals and the new army of Behavior Detection Officers-should be scaled back or eliminated if the TSA is unable to clearly quantify their cost-effectiveness.

And after 10 years, it is long overdue for Congress to revisit the conflict of interest that it built into TSA's role, by making it both the provider of airport screening and the aviation security policy-maker and regulator. The screening function should be devolved to the airports, which should be able to carry it out either by creating their own screener workforces (meeting TSA selection, training, and performance requirements) or by contracting with a TSA-approved security company of their choosing. If the cost comparison between TSA screening at LAX and outsourced screening at SFO released by the House Transportation & Infrastructure Committee in June is accurate, applying SFO-type best practices nationwide could reduce screening costs by about 40%.

Finally, it's become pretty clear from recent statements by members of Congress who were involved in crafting the 2001 ATSA legislation creating TSA that their intent was that TSA's aviation security program would be self-supporting from user taxes paid by airlines and passengers. As I pointed out last issue, the current airline and passenger security taxes cover only 35% of TSA's aviation security costs. There are two reasons for this. First, the TSO workforce is more than twice the size Congress expected it would be, thanks to typical bureaucratic bloat (which Congress has done nothing to rein in). Second, those security taxes have not been increased to keep pace with the program's cost growth, on the flimsy grounds that doing so would constitute "tax increases."

But in regard to those aviation security user taxes, I need to clarify what I wrote about them last issue. Early versions of the Administration's proposal called for increases that would make the TSA aviation security program self-supporting. But the version actually introduced would go far beyond that. Over a 10-year period, the new aviation security tax structure would produce $24.9 billion. That would fund an additional $9.9 billion of TSA costs but also $15 billion in deficit reduction.  I agree with the U.S. Travel Association that singling out air travelers for deficit reduction is unacceptable, but that an increase aimed solely at covering aviation security costs is appropriate, for the reasons I set forth last month.

News Notes

Gwinnet County Rethinks Bricoe Field's Future

Acting on recommendations in a report it commissioned from Infrastructure Management Group (IMG), the Gwinnett County (GA) Commission voted unanimously on October 4th not to seek to make Briscoe the Atlanta metro area's second commercial airport. In doing so, they decided to throw out the statements of qualifications they'd received from three teams interested in privatizing the airport and start over, seeking privatization proposals aimed at keeping Briscoe Field a general aviation airport. They also created a citizens advisory committee for the privatization effort, and voted to retain IMG as the privatization process proceeds.

UK Competition Commission Relents (a Bit) on Stansted

BAA made headway in its attempts to reverse the Competition Commission's mandate that it sell Stansted Airport to further reduce its market power in the southeastern England air travel market. The CC on October 7th accepted BAA's proposal that it reverse the order of divestitures, proceeding now with the sale of one of its two Scottish airports while its appeal on Stansted proceeds. The next step for BAA is to decide whether to put Glasgow or Edinburgh airport on the market.

All Contenders Qualified for Spanish Airports Privatization

All seven teams that submitted their qualifications to bid for 20-year concessions to operate and upgrade the Madrid and Barcelona airports have been accepted, AENA announced on September 14th. Three unions representing Spanish airport workers still plan a series of strikes in protest of the privatization plans.

FAA Grants Chicago's Request for Midway Extension

The FAA announced on October 4th that it had accepted the City of Chicago's request for yet another six-month extension of its slot in the agency's Airport Privatization Pilot Program.  The city now has until March 31st to submit "a reasonable and realistic timetable" for completing the privatization of Midway Airport. Within that time frame, it must also submit "a distribution-ready copy" of a request for interest or qualifications from potential bidders. Chicago holds the only large-airport slot in the pilot program.

Delta Considering Beefed-Up Cockpit Security

Delta Airlines announced last month that it is considering adding "enhanced cockpit-security barriers" to some of its planes. Several years ago United installed accordion-like folding barriers to provide an extra layer of security during times when the cockpit door must be opened in flight, either for restroom breaks or food and drink provision. A government-industry study group has been developing technical guidelines for such secondary barriers.

ASDE-X Now Operational at All 35 Airports

On October 3rd, Saab Sensis Corporation announced that it has completed implementation of the ASDE-X surface detection system at the last of the 35 airports in the FAA program. The system combines information from surface movement radar, multilateration, and ADS-B to give controllers an accurate, real-time picture of aircraft and surface vehicles on the ground at the airport. ASDE-X is also the platform for the FAA Runway Status Lights program and for new programs to schedule and manage aircraft movements on the airport surface.

John Clark, Airports Director of the Year

Airport Revenue News has named Indianapolis Airport Director John D. Clark III as the winner of its Airport Director of the Year Award, in the small hub category. Clark is former chairman of Airports Council International-North America and was previously director of the Jacksonville, Florida airport.

Quotable Quotes

"Governments all over the world are working to create conditions for meaningful investment in infrastructure. Airlines in many parts of the world engage in this process as partners, working with airport officials because they know that investment in airport infrastructure is critical to their being able to profitably perform their function in this global economic puzzle. But there is one glaring exception to this trend, right here in the United States. Rather than understand the need to invest in infrastructure, the U.S. government actually stands in the way of airports and local communities who want and need to finance infrastructure."

--Greg Principato, President, ACI-NA, in John F. Infanger, "State of the Industry Report," Airport Business, June 2011.

"Improved intermodality will provide better mobility, but it will not solve the airport capacity crunch. Independent forecasts clearly indicate that demand for aviation in Europe will nearly double by 2030. They also warn that extensive rail developments announced will only absorb 0.5% of the total demand for air transport. Given the ever-increasing difficulties and uncertainties that Europe's airports face in seeking expansion approvals, the blunt reality of unprecedented congestion will sneak up on us very quickly. Europe's airports need their license to grow!"

--Olivier Jankovec, Director General, ACI-Europe, in "Transport 2050: Infrastructure Drives Mobility, Airport Business, June 2011.

"The [EAS] program survives because most states get some aid and every state has two senators, who usually hang onto every federal dollar as if it were a Super Bowl ticket. Nor do politicians like to tell these communities the obvious facts of life. Small towns are ideal if you have an aversion to crime, congestion, noise, high rents, and scarce parking. But if good travel connections are your priority, you should live elsewhere."

--Steve Chapman, "Flights from Nowhere," Reason.com, August 8, 2011 (http://reason.com/archives/2011/08/08/flights-from-nowhere)

"We spend a huge amount of resources on screening people who, quite frankly, do not need it. We need to find a better way of doing it. Apart from the cost, we are putting our customers through an immensely complicated and, most of the time, unnecessary hassle. And airports are creaking at the seams to find the space and capacity to deal with this."

--Tony Tyler, Director General, IATA, in "Billions Wasted on Needless Airport Checks, Say Airlines," Guardian, Sept. 8, 2011.

"I think the private sector has an opportunity to play a large role. Privatization may well be in our future, much more aggressively than we've seen it in the past. Communities don't have the money to step up and pay the capital. It's going to be interesting to see what happens to the Branson airport and how that plays out. Cities are sitting on assets while trying to take care of their retirement obligations. I won't be the least surprised to see more communities trying to spin off that aviation asset."

--Kelly Johnson, incoming Chair, AAAE, in John F. Infanger, "Time to Get Local," Airport Business, July 2011.

"We should be adjusting the fee annually to reflect the cost of passenger screening. Why should some little farmer who never gets on a plane but pays his federal taxes be paying for some passenger's security screening?"

--Rep. John Mica (R, FL), in Jen DiMascio, "U.S. Senate Leader Drops New Aviation Fees from Jobs Bill," Aviation Daily, Oct. 7, 2011


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


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