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Posts Tagged ‘Deregulation 2.0’

On American.com today, I review Aviation Infrastructure Performance: A Study in Comparative Political Economy, edited by Clifford Winston and Gines de Rus. The book, which I highly recommend, includes several reviews of how other countries’ aviation infrastructure sectors have performed under varying levels of privatization — and what lessons could be learned for the United States.

Should We Privatize Airports? [The American]

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The Wall Street Journal has a fascinating item today (via the WSJ‘s great new Middle Seat Terminal blog) on the vigorous competition emerging between Moscow’s two main international airports. I’d long read of the older, state-owned Sheremetyevo Airport as a hellish transportation hub with limited services, long lines for immigration, and oft-solicited bribes. Then, according to report Daniel Michaels, it was forced to bring its game when the privately owned Domodedovo Airport renovated a terminal in the 1990s, built a rail link to downtown, and began wooing new airlines — and even carriers that had previously served Sheremetyevo.

Moscow’s airport rivalry highlights a paradox of the global aviation industry: Airlines compete fiercely with each other for customers, but they face many monopolist suppliers, such as air-traffic control systems, fuel distributors and airports. Resulting costs and poor services get passed on to travelers.

Regulators world-wide are starting to tackle the issue — and some see Moscow as a paradigm.

Britain’s competition authority, for example, last year considered breaking up BAA, the company that runs London’s three big airports. In testimony before the regulator, officials from the International Air Transport Association, a trade group, cited Moscow as evidence of the benefits that competition could bring London’s airport system. IATA testified that fees at Moscow’s fast-growing, privately owned Domodedovo Airport are as much as 20% lower than at Sheremetyevo, the state-owned hub of flag carrier Aeroflot.

This echoes a point I’ve made before: we have a relatively competitive airline sector and a relatively uncompetitive airport infrastructure sector.

The article also points out that privatization alone will not bring competition. Consolidating ownership in a single firm, either private (BAA) or public (Port Authority of New York and New Jersey), will not engender competition. One sees more competition (and lower published airport use fees) at the three San Francisco Bay Area airports, each of which are publicly owned by different authorities, than at the three New York area airports. And the case of Moscow confirms this.

But can private airports really work here in the United States? Two fascinating items from Brett Snyder illustrate an experiment in this. Branson, Missouri — a totally retro vacation spot not far from my hometown of Memphis — is building a brand-new airport entirely without federal money. The airport will be entirely privately owned and financed. It’s not just a new terminal project: this is an entirely new airport project — 7,000-foot runway, terminal, tower, general aviation facilities — designed to offer competitive service to low-fare airlines.

The owners of the airport have also kept their construction costs down. Writes Snyder: “To flatten the tops of the mountains, build a 7,000 ft runway, erect a terminal, construct a control tower, and create a 2.5 mile access road with 2 bridges has only cost $155 million. That’s $35 million in equity with the balance in debt. As a comparison, Indianapolis spent $1.1 billion on its new (much larger) terminal and control tower.”

We need more experiments in privatization like Branson, Chicago’s Midway airport, and others here in the United States. Competitive privatization may provide the needed funding for upgrading and maintaining our aviation infrastructure.

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If you’re a regular reader of the Aviation Policy Blog (and I hope you are; the best way to keep up to date is to subscribe to my feed), you’re well aware of how aviation is playing out in the 2008 election (or the extent to which it isn’t). In today’s Wall Street Journal, “Middle Seat” columnist Scott McCartney takes on what the next president will need to do. I commend this read to you. First, the stakes of inaction on aviation issues:

Last year, nearly one-quarter of all U.S. airline flights were delayed, and the average delay was 55 minutes, according to the Federal Aviation Administration. Passengers lost 112 million hours of time spent waiting. . . . And that doesn’t count the delay already baked into airline schedules. On average, U.S. airline flights were scheduled 15 minutes longer in 2006 than in 1997, based on the same distances. . . . Delays cost airlines $8.1 billion in direct operating costs in 2007, mostly burning extra fuel and paying crews for the extra time. That’s more than the U.S. industry has ever earned in a year. . . . More than 1,600 flights last year sat for longer than three hours waiting to take off, according to the Bureau of Transportation Statistics. More than 4.4 million bags were mishandled. Complaints about airline service were up 65% last year.

McCartney outlines several steps that the next president can take. He also underscores the urgency of making these changes now: “The time to fix it is now, when the economic downturn has given the system some slack. This is when it’s easiest to replace, repair and expand.” We didn’t do this during our last downturn, after 9/11, and it hurt badly in 2006-2007. So, what does he recommend?

  • Air traffic control modernization. “The current time-table for modernizing air-traffic control covers 20 years, and the history of the effort is filled with delays. What’s needed is a full-court press. He then quotes Marion Blakey on how viable ATC transformation is, but her five years at the helm of the FAA and in charge of NextGen are conveniently glossed over.
  • Split the FAA into two agencies. “Many industry watchers would like to see the FAA split into two parts: a safety regulator for airlines, airports and air-traffic controllers, and a separate air-traffic-control system run in a business-like manner by a not-for-profit entity, not government.” That includes this industry-watcher. “One major reason to split the FAA is that the agency today is both the safety regulator and the operator,” McCartney continues. “In air-traffic control, the FAA regulates itself, leading to potential conflicts of interest.” He cites Dorothy Robyn’s excellent paper this summer for the Brookings Institution’s excellent Hamilton Project. He also quotes former Continental chairman Gordon Bethune, who carries the flag for ATC privatization/commercialization: “Bethune . . . hopes the new president will push for ‘a quasi-government agency to build and operate a modern air-traffic-control system.’ Bond financing could be used for new equipment instead of asking Congress to pay for it year by year.”
  • Other issues. McCartney urges measures to make TSA screening less invasive and troublesome; passenger-bill-of-rights-type measures, a “better plan” to ease congestion at New York-area airports, “a Transportation Secretary with muscle to fix the problem, not prolong it,” and incentives for greener, cleaner aerospace R&D.

To McCartney’s memo, I would add the following items:

  • A new FAA administrator, hired from outside the agency, with respect from industry and labor. Labor-management relations at the agency are beyond toxic, and promoting current management (as Bush did when he nominated Robert Sturgell) is only going to inflame the situation. To the extent that Barack Obama has engaged in aviation issues, he has been entirely aligned with the air traffic controllers; he needs to demonstrate his independence by picking someone who will command the controllers’ respect and negotiate with them while still defending the prerogatives of the FAA’s “customers”–system users–and taxpayers.
  • A commitment to an alternative funding structure for the FAA. Ticket and fuel taxes are not enough. The FAA needs a user fee system. This will align use of the system with the cost of providing ATC services. The current administration has admirably pushed for user fees; perhaps, in an environment less rabidly partisan than that existing between Congress and the White House, we can see rapprochement on this crucial priority.

Commentators rightly say that thirty years out, we’re not going backward on airline deregulation. But will the next president take crucial steps in pursuing “Deregulation 2.0,” the critical public-sector overhaul that will make our aviation system more competitive, productive, and efficient for decades into the future? If the next president takes on established interests and pursues these reforms, future generations of fliers will thank him.

A Flier’s Plea to the New President [WSJ]

See also the LA Times and FlightBlogger guides to the politics of air travel.

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My story in The American magazine is now up on its website. Here’s the lede: “Thirty years ago this October, the era of affordable mass air travel was unleashed. Why was this revolution stalled, and what can be done to finish it?”

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The Aircraft Owners and Pilots Association have released the candidates’ answers (or, more accurately, the campaigns’ answers) to their election questionnaire. One of the interesting points about this questionnaire is that even though John McCain has not articulated an aviation agenda, he/his campaign can draw on his Commerce Committee experience to answer these questions pointedly and with examples. Barack Obama’s answers are vague, inconclusive, and sometimes evasive.

For example:

General aviation airports are an important part of the national air transportation system but are often faced with the threat of closure or limits on access. How will you support general aviation airports as part of the national airport system?

McCain:
If I am elected, one of my top transportation priorities will be to modernize the air traffic control system so it can handle the increased traffic that is forecast. The current system cannot efficiently handle these increases. Gridlock in the sky and on the ground at our airports won’t just result in longer delays for airline passengers, but it will also affect general aviation—especially in the busier airspace around our major metropolitan areas. Under such a scenario, it could become very difficult for pilots to use general aviation airports in that airspace, particularly at peak times. In my view, making better use of the air space won’t benefit just commercial aviation, but general aviation as well.

Obama:
General aviation produces over a million jobs in America and is an invaluable part of our economy and the lifestyle of American families across the nation. As president, I will engage the general aviation community in the FAA decision making process and take steps, as I did as a state senator, to ensure that government continues to determine how best to meet the needs of general aviation practitioners.

On the controversial subject of user fees, McCain points out that the acrimonious debate is harming all parties. Obama says, well, not much of anything: (more…)

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From the blog of the Reason Foundation, the think tank with one of the country’s leading aviation policy programs. Key quote:

The main downside is that once the three remaining slots in the Pilot Program are filled, nobody else can privatize their airport—unless and until Congress expands that legislation. And that has to be seen as a huge question mark. As of today, Congress is a full year late in reauthorizing the Federal Aviation Administration, and with it the long-running airport grants program. If they give aviation such a low priority, it’s hard to imagine them rushing to expand an obscure piece of aviation legislation, especially to expand the scope of the dreaded P-word.

Still, city and county budgets are likely to be in worse shape next year than they are now. If America’s mayors and legislators call for expanded airport privatization, even a Democratic Congress might actually take them seriously.

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DALLAS — Chicago’s Midway Airport is the first major airport in the United States to be privatized. Yesterday it was announced that it had been sold to “a consortium consisting of Citi Infrastructure Investors, YVR Airport Services (a joint venture between Vancouver airport and Citi Infrastructure Investors) and John Hancock Life Insurance,” according to the Financial Times. It will be operated by the Vancouver airport owner. The big surprise, according to Southwest Airlines folks I talked to last night, was how competitive the bidding was in a tight economy. The final price was $2.5 billion, and among the bidders were consortiums including the biggest names in airport infrastructure: Germany’s Hochtief, GECAS, Aeroports de Paris, and Australia’s Macquarie Group. (Southwest folks are very pleased with the opportunity to work with a private owner, and as the largest airline at Midway, they’ve been consulted and involved in the process all along.)

The great thing about this purchase is that it gives us an opportunity to test the performance of a privatized airport in the U.S. market, which is almost entirely under public ownership. It is part of the FAA’s Airport Privatization Pilot Program, and the Midway experience may clear the way for more infrastructure privatization in the future.

Chicago Midway in $2.5bn privatisation deal [FT]

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One of the few cases where Adam Smith advocated public provision was that of large-scale infrastructure, and in particular transportation infrastructure, which he saw as a prerequisite for economic growth. His rationale was essentially an institutional one: private finance markets were neither large enough nor sophisticated enough to handle the scale and the long payback period associated with such investments. Ironically, in most developed countries, the modern world sees governments increasingly going to the private financial markets to fund infrastructure investments, either in their entirety or in some form of partnership, because the governments do not have the ability to raise the necessary capital. The sums involved are large. The World Bank estimated in 1995 that airport infrastructure alone would require $350 billion for upgrading and maintenance by 2010, and that was before the additional security systems now needed. Smith’s argument, however, may still have some validity regarding lower-income nations where capital markets are poorly developed, risk is high, and access to international funds can be very expensive.

– Kenneth Button, “Air Transportation Infrastructure in Developing Countries: Privatization and Deregulation,” in Aviation Infrastructure Performance: A Study in Comparative Political Economy, ed. Clifford Winston and Gines de Rus (Washington: Brookings, 2008).

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Transportation Secretary Mary Peters usually gets a bad rap in aviation policy circles. Even though her professional background is in highways, she ought to be better versed in aviation than this or this suggests. But I am very unimpressed with her latest initiative, announced Tuesday in Atlanta: a comprehensive national transportation policy. It is based on reducing gridlock and includes several market-oriented, incentive-shaping changes. I haven’t read the full plan yet, and I will soon engage with the aviation section, but the timing of this is ridiculous. Five months before the end of an administration is not the time to announce a “complete overhaul” of U.S. transportation policy. Her tone seems to believe she is working in 2001; she speaks of “unveiling” a Bush administration plan. Um, didn’t we have seven and a half years to do this? Peters herself has been secretary for almost two years; surely we could have seen a national plan before now.

The likelihood, therefore, of this transportation agenda being enacted is slim to none. Barack Obama’s transportation plan has some different objectives than the president’s, including more density and more federal-level involvement in planning. John McCain doesn’t seem to have much of a transportation policy apart from opposing porcine transportation earmarks. Either will likely diverge from the just-proposed plan. This plan, which I’m looking forward to reading, is years overdue and now arrives too late to be useful.

But now it’s time to pivot and praise Secretary Peters. Her transportation department has often advocated introducing market forces into the U.S. transportation infrastructure, and her July 22 op-ed in the New York Times defending the FAA’s peak pricing plan is good. She opens with a discussion of slot pricing that echoes what most economists say is wrong about landing fees: that they are weight-based. She also exposes the airlines’ inconsistency in opposing congestion pricing:

The airlines prefer the status quo, which is simply not working. Americans deserve better.

At a recent Congressional hearing, the head of the airlines’ primary lobbying organization, the Air Transport Association, asserted that pricing is not an effective mechanism for balancing supply and demand for landing slots. When lobbyists argue that basic economic principles do not apply to the industry they represent, a red flag should go up.

After all, the airlines themselves lower ticket prices to attract passengers when demand is low and then raise prices to maximize revenues when demand is high. What would happen if airlines were required by the government to charge the same ticket price for travel on Dec. 24 as they charge in the middle of September? There would either be rationing of extremely scarce seats on Dec. 24 or exorbitantly high prices for widely available seats in the middle of September. In either case, this inefficient outcome would damage the economy broadly and the aviation sector specifically.

Peters conveniently neglects to mention the FAA’s failure to make technological improvements that would have permitted airlines to meet demand, but she does explain part of the reason why: there’s a disconnect between the funding for those improvements and use of the system.

The argument championed by airline lobbyists and some of their Congressional supporters that “we just need more capacity and technology, not pricing” incorrectly assumes that these are competing concepts. But the main reason we have failed to add capacity and modernize our air traffic control system is that our approach to paying for aviation infrastructure completely disconnects the price of using capacity from its true costs and thus promotes overuse at popular airports and during popular flying times. . . . Independent economic experts of all political backgrounds agree that either auctions or congestion pricing is far preferable to the failed experiment we have now.

Congestion pricing is the most rational and efficient way to allocate congested and in-demand runways and airspace. This is part of Deregulation 2.0, the unfinished work of airline deregulation. We (successfully) deregulated the industry three decades ago; it’s now time to unleash competition in the aviation infrastructure sector. Peters agrees:

In the 1970s, many of the industry’s lobbyists took the position being espoused today — that basic economic principles could not be applied to commercial aviation, that competition would not work and that consumers would be harmed if airlines were given the freedom to design their own networks and to set prices based on market forces.

The lobbyists were wrong then. They are wrong today.

What can I say? When you’re right, you’re right.

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