In this issue:
- GAO on slot-controlled airports
- Who would benefit from runway pricing?
- Airport screening and the 9/11 attacks
- Airlines fight higher taxes
- House GOP on TSA reform
- News Notes
- Quotable Quotes
The question posed by the Senate Commerce Committee to the Government Accountability Office was this: Do the slot-control rules at Reagan National (DCA), Newark (EWR), Kennedy (JFK), and LaGuardia (LGA) reduce congestion, maximize use of available capacity, and encourage competition? The answer, according to GAO-12-902 (September 2012) is no on all three counts.
As the GAO analysts note, DOT data show that among 29 major airports, on-time arrival performance is 29th at EWR, 27th at LGA, 25th at JFK, and 22nd at DCA. Very recent analysis by Mitre Corporation, for the FAA, found that one-third of all airline delays nationwide are directly affected by delays in the New York/Philadelphia area. To be sure, congestion at these four airports is somewhat less than it was when slot controls were temporarily lifted several years ago, but it's quite clear that despite the slot controls, these airports' impact on overall delays and congestion is still greatly disproportionate.
How about maximizing productive use of available capacity? Here the GAO analysts conducted a regression analysis to test the idea that major carriers at the slot-controlled airports are engaging in slot-hoarding, by using smaller planes to hang onto slots that they might otherwise have to give up under FAA's "use-it-or-lose-it" rules. Using a data-set of 28 large airports, they found that airlines serving the slot-controlled four airports are 75% more likely to use planes with fewer than 100 seats than airlines serving the other 24 large airports. When the same regression was run using 80-seat planes as the cut-off point, airlines at the slot-controlled airports were 55% more likely to use them. This pattern is most extensive at LGA and least extensive (relatively speaking) at EWR.
And this is with FAA's pretty loose definition of "use-it-or-lose it," requiring use of slots at least 80% of the time. That percentage is standard at the mostly slot-controlled airports in Europe, but there it applies to every slot, rather than to an airline's whole pool of slots. And GAO also concluded that FAA's "record-keeping does not provide sufficient assurance that it can adequately identify instances when airlines do not meet the 80 percent slot usage requirement." This is due to inadequacies in its database, to its reliance on self-reporting by carriers, and other factors. Consequently, "FAA does not know precisely how much available capacity goes unused."
The report also notes that both the Port Authority (operator of the three New York airports) and the Justice Department have warned about slot hoarding by incumbent carriers there. For example, "Port Authority officials told us that airlines in the past have announced new air service without obtaining any new slots. However, the only way for an airline to add more flights without obtaining more slots is that the airline begins using a slot that it was not fully utilizing before."
Thus, even though the always carefully-wording GAO never comes right out and says it, the slot system in use today does a poor job of reducing congestion, fails to maximize use of the airports' limited capacity, and works against competition to incumbents by new entrants.
The DOT under Secretary Mary Peters attempted to introduce a limited slot auction system, but gave up due to opposition from most of the airlines and from the Port Authority. In 2010, the current DOT began developing a new "Slot Management and Transparency Rule" for the three New York airports to replace the temporary slot controls imposed by the previous Administration. GAO says the new rule will likely focus on a secondary market for slots. But as I have written many times before, slot auctions in practice are unlikely to be anywhere near as effective as runway pricing in addressing the Senate Commerce Committee's three concerns.
Runway pricing, once implemented, would apply to all flights, not just to the 10 to 20% of slots that are underused and might eventually be auctioned. So it would have a far more powerful impact on congestion and use maximization, as well as enabling newcomers to buy their way in to the extent they valued doing so. (This case is far too long to make in detail here: see the 2007 Reason Foundation study "Congestion Pricing for the New York Airports" at http://reason.org/news/show/congestion-pricing-for-the-new).
Over the years I have read many research papers on runway congestion pricing, which most transportation economists favor. But until recently, I had not paid attention to a serious flaw in most such papers. Almost without exception, they assumed that all passengers have the same value of travel time saving. This same highly unrealistic assumption has also been used until recently in studies about urban freeway congestion pricing, but economists in that field now have hard evidence of the huge "heterogeneity" in commuters' value of time, and are incorporating it into their models.
So I'm pleased to introduce you to a November 2007 study that I discovered only recently: "Airport Congestion Pricing and Its Welfare Implications: The Variable Passenger Time Cost Case," by Andrew Chi-Lok Yuen and Anming Zhang of the University of British Columbia's Sauder School of Business.
There's a lot of math in this paper, which I will spare you, so as to focus on Yuen and Zhang's results. Their model confirms the finding of other researchers that in the typical airline (oligopoly) conditions at congested airports, those airlines do not fully internalize the delay costs of congestion: they do take into account the delay their peak-period flights impose on their own flights but not the delays they impose on other carriers. But they also find that airline pricing does not take explicitly into account the much higher value of time of time-sensitive (mostly business) travelers. And that is the key to their finding that once you take these higher time values into account, peak-period travelers may well be better off paying higher peak fares because the value of their time savings exceeds the extra cost of the peak fare.
Who else might win and lose under airport congestion pricing? The airport would always be better off, generating higher net revenue (assuming there is no externally imposed constraint to redistribute those revenues to others). Passengers who normally travel off-peak would be no worse off, but those with low values of time who used to travel at peak times but switch to off-peak would generally be worse off.
What about airlines? In their formal modeling, the authors assume that all the airlines are the same and would be made worse off by congestion pricing. But in their concluding section they suggest that a more realistic assessment should take into account the difference between legacy carriers and low-cost carriers (LCCs). They note that "legacy carriers usually serve a higher portion of business travelers, while low-cost carriers serve a higher portion of leisure travelers." Hence, congestion pricing will affect the two types of airline differently. Pricing "may induce an increase in demand for legacy carrier services due to the time cost savings" they could then offer to their higher-time-value passengers. And since those same carriers operate more flights during peak periods due to hubbing operations, the reduced peak-period congestion due to pricing would produce operating cost savings for them during peaks. I wish they had actually modeled this, rather than presenting it as a provocative possibility in their concluding paragraphs!
If Yuen and Zhang are right about this, it stands conventional wisdom about airport pricing on its head. It is the legacy carriers at the New York airports that have most stridently opposed congestion pricing, while the most interest in pricing has been evidenced by LCCs hoping to gain market share by being able to buy their way in. Clearly more research is needed on how actual airlines would respond to serious airport congestion pricing.
Last month federal judge Alvin Hellerstein rejected a motion by American Airlines and United Continental to dismiss a lawsuit that blames the destruction of the World Trade Center on Sept. 11, 2001 on flawed airport screening. The suit, brought by WTC tenants seeking compensation, will presumably proceed to trial.
The connection to these two airlines stems from the way airport screening was carried out in those days, prior to creation of the TSA. The FAA was responsible for aviation security regulation, and it imposed an unfunded mandate on airlines to provide checkpoint screening. It's never been clear to me why the mandate was imposed on airlines rather than airports, but apparently since the original purpose of checkpoint screening was to prevent weapons from being brought on board airliners, and since in many cases specific airlines more or less ran concourses of gates devoted mostly or entirely to their flights, there was a certain rough logic to this policy.
But that's where the logic of this case stops. Since the unfunded mandate was imposed by the FAA on airlines, they understandably sought to comply with the mandate at the lowest possible cost—just as they do with all other operating costs. And since there were essentially no standards for FAA-mandated screening, this led to a low-cost system using security contract firms selected by low-bid. GAO and FAA's own "red teams" documented the poor performance of this screening as far back as 1978. GAO in 1987 recommended that performance standards be established, but the FAA failed to act. Congress eventually ordered (in the 1996 FAA reauthorization act) the agency to develop certification requirements for airport screening companies, as well as the implementation of uniform performance standards. It took the FAA more than three years to come up with a proposed "Certification of Screening Companies" rule in January 2000. When that rule had still not been finalized by November 2000, Congress ordered FAA to issue the final rule by May 31, 2001. After FAA failed to meet that deadline, Congress required the agency to report twice a year on the status of each missed statutory deadline. The attack on 9/11 occurred without the new rule and standards in place.
So point 1 is that airlines, as of 9/11, were complying with the regulations in place as of that date, no matter how pathetic those regulations were. Point 2 is that, as most people know, the apparent weapon used by the 9/11 terrorists—box cutters—were not prohibited items at that point in time. So no matter how low the quality of airport screening may have been at that point, it was not the failure of either the screening companies or the airlines that employed them that led to the successful take-overs of the cockpits of those planes.
Point 3 is an intelligence failure, in which the various agencies charged with protecting this country from terrorism failed to connect the dots that would have identified the terrorists and either prevented them from flying or at the least subjected them to heightened inspection at the checkpoint. This could have been done, in part, by an information system called CAPPS (Computer Assisted Passenger Prescreening System) that had been in operation since 1998, had that system been allowed to be used to identify higher-risk passengers. But a 1999 FAA regulation limited CAPPS to determining which passengers' checked bags should be screened for explosives. For fear of being accused of allowing "discrimination," FAA barred airlines from using CAPPS to identify passengers who should be searched and questioned. Nine of the 9/11 hijackers had been flagged by CAPPS, but none were searched at the checkpoints.
Thus, if any party should be sued for damages over the destruction of the World Trade Center, it should be the FAA. That agency failed to provide standards for passenger screening companies, like those that were in place at the time at numerous European airports that use certified security firms for screening. And it prevented airlines from using a tool that could have stopped at least nine of the hijackers from boarding the flights in question.
The WTC tenants' suit against the airlines is completely wrong-headed and should have been dismissed. And if there is any justice in the world, the court will find that there is no cause to hold the airlines responsible for the 9/11 tragedy.
Airlines for America (A4A) has been waging a public relations campaign against the taxes imposed on passengers by the federal government and by airports. On the A4A website you can find a sample round-trip itinerary for a round trip from Peoria to Raleigh Durham, via O'Hare. Including the various user taxes that go to the Aviation Trust Fund, the security surcharges that support a portion of the TSA's budget for airport security, and the passenger facility charge (PFC) levied at each airport on the itinerary, this flight totals $61.12 in taxes paid by the passenger, which is 20.4% of the total ticket price of $300. A4A also notes that between 1990 and today, the number of taxes imposed on air travel has grown from six to 17, and the aggregate amount paid has increased from $3.7 billion per year to $17 billion.
Across the Atlantic, an alliance of more than 30 airlines and tour operators is running a Fair Tax on Flying campaign, aimed at reducing or eliminating the U.K. government's Air Passenger Duty, which it calls the highest air passenger tax in the world. Some 75 Members of Parliament have signed an "early day motion" that calls for the Treasury to look into this tax's impact on travel and tourism. The campaign notes that over the past seven years the proceeds from this tax have risen by 360%, and are projected to increase by another 77% between now and 2017. The numbers in a late-August article in the Daily Mail are in British pounds and are for a family of four, which makes the numbers look huge. I have converted them to US dollars and divided by four, to make them comparable to the per-passenger U.S. numbers. On that basis, the APD for individual Britons is $33.50 for a trip to continental Europe, $95 for a trip to the United States, $118 for a trip to the Caribbean, and $134 for a trip to Australia. To be sure, when multiplied by four to account for a family trip, those are pretty big numbers.
Are airline trips over-taxed in both countries? I think they clearly are in the U.K. The Air Passenger Duty in Britain is a pure tax on travel—the proceeds are general government revenue. And as the old maxim goes, when you tax something there tends to be less of it. The Fair Tax on Flying people point out that due to negative effects on travel and tourism, both the Netherlands and Spain have reduced or abolished similar taxes on air travel.
For the United States, however, things aren't quite as simple. All but $10 of the $61 in taxes in A4A's example are infrastructure fees. The ticket tax and segment fee are the main source of revenue for the Aviation Trust Fund, which covers the majority of the FAA's budget, for air traffic control and airport grants. And the PFC, of course, is a local infrastructure fee to improve the specific airports the passengers in question are using (and it can be used only for FAA-approved runway and terminal capital investments). The remaining $10 of the $61consists of Federal Security Surcharges for each leg of the trip—money that pays for a portion of airport screening. Thus, 100% of the $61 goes to provide infrastructure and services used by airlines and their passengers. None of it goes into the federal general fund, in sharp contrast to the U.K. Air Passenger Duty.
And in point of fact, airlines in Britain have to pay for all the same aviation infrastructure as U.S. airlines. In the U.K., airlines pay directly for air traffic control services provided by NATS, and they pay directly for each airport's capital and operating costs (including airport security) via their landing fees and space rentals. All of those costs are already included in the air fare in Britain; none of them are paid for via the Air Passenger Duty.
There is no good reason why U.S. airline passengers—as opposed to airlines--should be directly paying for aviation infrastructure. So in that sense, I'm with A4A when they object to all these "taxes" on airline tickets. But the costs of airports and air traffic control would still be there, if we changed the model to one where airlines pay directly to use ATC and airports. That's how it's done in all other modern countries, and we are overdue to make that shift here. Those airline infrastructure costs would no longer appear as visible line items on the ticket, any more than fuel does.
I noted last month that in July I testified before the transportation subcommittee of the House Homeland Security Committee. In my general experience, hearings of this sort appear to be mostly theater, so although I prepared my testimony in good faith, I had little expectation of its being taken seriously enough to affect aviation security policy.
So I was pleasantly surprised last month when that subcommittee produced a Majority Staff Report offering a number of recommendations, including mine. You can download "Rebuilding TSA into a Smarter, Leaner Organization" from: http://homeland.house.gov/files/092012_TSA_Reform_Report.pdf.
Rather than offering an overall rethink of TSA, after its first decade of existence, the report instead offers a laundry list of mostly small reforms, loosely organized around five themes:
- Advance risk-based security
- Strengthen privacy protections
- Limit spending
- Create more private-sector jobs
- Cut red tape.
In a general sense, those are hard to argue with, but I wish some of the individual recommendations were bolder.
Under risk-based screening, the report rightly calls for expanding PreCheck eligibility beyond just those at premium levels in airline frequent flyer programs. And while it faults TSA for failing to meet a congressional deadline to allow military personnel traveling in uniform to use PreCheck, it fails to address the need for (a) background checks, and (b) biometric I.D. for a broader risk-based program, as urged for the past decade by numerous advocates of aviation security.
Under the general heading of privacy, the report cites the lack of validation of TSA's behavior detection program, but instead of proposing to use the power of the purse to halt the program unless or until there is an independent scientific rationale for its effectiveness as an anti-terrorism mechanism, the report simply repeats previous calls for such validation. Meanwhile, the program expands with every passing year.
Under the heading of wasteful spending, the report rightly questions TSA's occasional forays into transit and passenger rail security, by deploying "VIPR" squads to harass passengers, sometimes after they have left the transit vehicle. While citing the lack of evidence that this sort of thing does anything to reduce terrorism, once again the report does not call for abolishing VIPR unless and until it can be shown to be cost-effective.
I appreciate my testimony on outsourcing passenger and baggage screening being cited in the report, including my fundamental point about TSA having a built-in conflict of interest as both the aviation security regulator and the primary provider of airport screening. But aside from calling for an expansion of the existing Screening Partnership Program, the report simply notes the conflict of interest and moves on. At least that basic concept is now on record.
At a number of points in the report, TSA is faulted for failure to meet congressionally imposed deadlines—most egregiously for not publishing final security measures for foreign aircraft repair stations that are increasingly used by U.S. airlines. But the report never goes beyond exhortation. There have been many cases over the years in which Congress motivated recalcitrant agencies to take action by withholding portions of their budget. We'll know when Congress is getting serious about holding TSA accountable when it begins selectively cutting its budget.
San Juan Privatization Getting Closer. The FAA last month began a 60-day public comment period on Puerto Rico's proposed 40-year lease of the San Juan International Airport under the federal Airport Privatization Pilot Program. Comments are accepted until November 18th. Following a public hearing on Sept. 28th, a spokesman for the winning team told Aviation Week that FAA approval is likely within 30 to 60 days after the close of the comment period. Airports Council International-North America filed comments in support of the plan, noting that it will permit the funding of major airport infrastructure investment needs.
More Common-Use Facilities Coming, Says Unisys. The need for airports to make more efficient use of their facilities will lead to more common-use facilities in coming years, says a new report from Unisys. And because this model will lead to airlines paying only for the services they use, it will reduce airlines' airport costs. The same cost pressures on airports will lead to development of more revenue-generating real-estate development, both as part of airports and on adjacent properties. And airports will increasingly develop centralized IT systems to provide real-time knowledge of all the various systems and processes.
Santa Monica Outsources Landing Fee Management. July marked the first anniversary of Santa Monica (CA) Airport's contract with Vector Airport Solutions to manage landing fee revenue generation. The company's FlightRev system uses three different technologies to identify the tail numbers of 99+% of the aircraft using the airport. In June 2012 the system identified 4,019 aircraft for billing, compared with just 733 identified by the previous radar tracking system (kept in operation for comparative purposes). The old system alerted airport police when a plane landed, requiring them to interrupt their duties and manually obtain the tail number.
Branson Airport: Bad News and Good. Privately developed Branson (MO) Airport in July notified its bondholders that for the second time this year, it would not make the scheduled $3.4 million interest payment on the airport bonds. Branson has been in default since January 2011; since April of that year, it has been operating under a forbearance agreement with the bondholders, which the airport is asking them to extend. The good news is that, also in July, Southwest Airlines announced that it will continue the former AirTran service to the airport, as the latter gets fully merged into Southwest.
TSA Admits Limits to Expanding Checkpoints. At the ACI-NA conference in Calgary, TSA division director for checkpoint technology, Domenic Bianchini, told attendees that the agency realizes that it will not be feasible to continue expanding the footprint of airport screening checkpoints as passenger numbers continue to increase at 4.5 to 5% per year. The alternative, he said, is to "leverage technology and process to build efficiency into the screening system." What he seemed to mean by that is to expand risk-based measures such as PreCheck, so that trusted travelers receive expedited screening in separate lanes that move much faster, thereby processing more passengers per hour without losing security effectiveness.
EU Liquids Ban Remains in Place. Despite a law enacted by the European Parliament that would rescind the ban on carrying full-size bottles of liquid in carry-ons as of April 2013, the European Commission in July ruled that lifting the ban is not feasible, given that the available technology to screen large bottles is slow, and would likely lead to expanded checkpoints and longer lines. The Commission recommends waiting until January 2014 for the first step in liberalization, with a further step in 2016 or later. It must also ask Parliament to amend the current law. The decision is a victory for airports, which lobbied strongly against lifting the ban due to increased costs and degraded services.
Two Montana Airports Get OK for Outsourced Screening. The TSA has approved the applications of the airports of Bozeman and Butte, Montana to participate in the Screening Partnership Program. Now, like Glacier Park (MT), Sacramento (CA), and Sanford (FL), they must wait to see if TSA will approve a proposal from a certified screening company that will "not compromise security or detrimentally affect the cost-efficiency or the effectiveness of the screening" at each airport.
Saudi Airport Concession Financed. Turkish airport operator TAV Airports, along with two local partners, has closed the deal to develop a state-of-the-art passenger terminal in Medina under a 25-year concession. The financing is 64% debt and 36% equity, with National Commercial Bank, Arab National Bank, and SABB providing a debt package of $700 million for the $1.1 billion project. Medina is the second-holiest city in Saudi Arabia and the country's fourth largest city. It has long been unable to adequately handle for flow of pilgrims arriving by air; the new terminal will be designed for up to 8 million annual passengers, compared with the 3.3 million handled in 2010.
Heathrow Runway Prospects Improving. A U.K. cabinet reshuffle has led to the departure of anti-runway Transport Minister Justine Greening, potentially signaling a shift of government policy on adding a third runway at congested Heathrow Airport. Just prior to the cabinet change, a group of MPs called for "immediate" measures to increase the airport's throughput, such as shifting private planes to nearby Farnborough Airport and overturning the long-standing government policy against "mixed-mode" operations on the two existing runways. NATS, the U.K. air navigation service provider, estimates that allowing both landings and takeoffs on the same runway when demand warrants could increase capacity by 15%, permitting about 60,000 more flights per year; current policy restricts one runway to landings and the other to takeoffs. Chancellor George Osborne is reported to be in favor of this change.
Myanmar (Burma) Seeks Bidders for Airport Concession. The reformist government of Myanmar has issued a request for qualifications (RFQ) from companies or consortia interested in a concession to design, finance, build, operate, and maintain an expanded Mandalay International Airport. The Department of Civil Aviation hopes to improve passenger facilities as well as developing the airport into a major logistics hub. The airport, 35 km. south of Mandalay, has the longest runway in the region, at 14,000 ft.
"As a principle for devolving airports to community controlled corporations, Transport Canada started with the simple premise that the federal government should be 'no worse off' than it was at the time of transfer in terms of revenues and costs. That position has since evolved to a position in which the Government of Canada looks at airport rent as part of its overall tax policy. Nothing is static, and governance of the airport industry in Canada continues to evolve. In the past 20 years, all of Canada's international gateway airports—including the largest, Toronto Pearson—have been transferred to Airport Authority control along with the major regional airports. Should the situation continue to full privatization, perhaps by fully transferring the federal assets to the local entities created to operate, manage, and develop them? Some think so, and a recent Senate of Canada report indicated that it might be an appropriate next step."
—Neil Raynor, VP Airports & Aviation, SNC-Lavalin, Inc, presentation at ACI-NA 2012 Annual Conference, Calgary, Sept. 12, 2012
"Traditionally in the U.S., airlines lease space from the airport authority and run their own systems and processes, often resulting in duplicated and inefficient resources within an airport, such as check-in counters and gates. However, competitive pressures and the rise of low-cost carriers are forcing airport operators to take a more holistic view of their operations and consider moving to a centralized, common-use mode for running their facilities. Such a model could allow airport operators to make more efficient use of their resources, process more passengers, offer more aircraft slots with existing infrastructure, and create new revenue streams."
—Olivier Houri, President, Global Transportation, Unisys, "Unisys Predicts U.S. Airports Will Move to Common-Use Facilities Model to Reduce Costs and Create New Revenue Opportunities," news release, Sept. 10, 2012