The myths surrounding airport public-private partnerships often distract policymakers from the opportunities that these transactions can offer. But an open mind, commercial awareness, and the use of experienced advisers can cut through the clamor.
“In time of need, sell the family jewels.”
When fiscal space is tight, government budgets are stretched and the economy has seen better days, there is a temptation to “sell” high value state assets in an effort to “release” value. An airport is a prime target with good revenues, access to foreign exchange, and a golden future. It is tempting for decision makers to want to sell off an airport. This may not be the wrong decision, but this is the wrong reason to make that decision. Careful analysis is needed. In particular, would the government be better serviced by a share in revenues instead of an outright sale (not to mention control and incentive issues)?
Buy low and sell high: the same logic applies to privatization. The analysis needs to be done in a dispassionate, careful manner, considering whether to sell now when improvements are needed, or share in the profits later.
“The myth of the hospital pass.”
In the great game of rugby, a “hospital pass” involves chucking the ball to a teammate seconds before experiencing a near-fatal tackle by the opposing team. (The tackle is likely to result in a hospital visit.) Some see airport PPPs as the “hospital pass” of the transport sector—a way to offload the difficult and expensive challenges of an airport to the private sector. While PPPs are a good way to get more help resolving such issues, it is worth remembering that the government never steps out of the airport, it merely brings in a partner (hence the name “public-private partnership”). Or, PPP might stand for “preparation, preparation, preparation,” requiring careful thought and analysis before commencing the bid process. The government needs to know exactly what it wants, where the risks lie, and how those risks will be allocated before starting a dialogue with private investors.
“Build it and they will come.”
It is commonly believed that after the airport terminal expansion is completed, passenger traffic will increase. But this belief is not necessarily related to capacity concerns. It is a response to wishful thinking: that because there has been an investment, a return may follow. Traffic will increase only if an investment solves an operational restriction on the airside (runways, taxiways, and apron). Stylish new terminal buildings will not alone increase traffic because passengers are not motivated by an airport to travel, but rather by business, tourism, or a visit to friends and relatives. The traffic is the response to the market needs, and it exists apart from the airport infrastructure. Investments in airport terminals are driven primarily by the need to provide a good level of service to users (passengers and airlines), and at the same time they serve as a source of national pride.
“Leave well enough alone.”
Private involvement is a huge undertaking. It is expensive to prepare, and requires bravery (to address entrenched interests and those less keen to use transparent, competitive procurement). Therefore, some would prefer to avoid private involvement and continue to muddle along. But it is a myth that these difficult decisions can be avoided. When ignored, they grow worse, and more costly. Whether PPP or public reform, these difficult issues need to be addressed.
“It’s all about airports.”
Public sector airport authorities are often specifically focused on airport functions and their management. This may limit attention to the commercial returns available for airports and associated businesses. Yet PPPs leverage heavily off of these commercial revenues. Developing the commercial side of the airport is important to improve the quality of service for the passengers, and to mobilize finance for infrastructure. Decision makers need to understand this dynamic, the detail of how those revenues will be made, and when they should be shared with the government.
“It has nothing to do with the airport,” a.k.a. “It’s just a shopping mall with airplanes.”
The potential for non-aeronautical revenues can transform a marginally profitable airport into a gold mine, but beware the tendency to focus on hotels, conference centers, car parks, or property development. The government needs, first and foremost, a well-run airport. The investor needs to be looking at operating the airport first and making this extra money later. A focus on non-aeronautical operations—in particular during the bidding criteria—can result in the selection of less proficient airport operators, or bids that have not planned well for high-quality airport services.
“It will be a hub.”
Policymakers and airport managers often claim that they will attract more traffic to their airport by making it a hub. But an airport does not become a hub just by being blessed with a privileged geographical location, or by investing heavily in infrastructure. To be a hub, an airport needs to be chosen by an airline that wants to base its operations there. For that to happen, an airport needs an important concentration of origin and destination (O&D) traffic of high-yield passengers to subsidize the lower yield connecting traffic. In other words, passengers have the option to take direct flights, and choose routes connecting through hubs due only to lower fares. Passengers are generally willing to pay a premium for the convenience of direct flights. Airlines cannot operate profitably by transporting the majority of their passengers connecting between points other than its base. The large network of routes generated by the demand of the O&D traffic makes it an ideal connection center for passengers coming from other airports. Without a great deal of the traffic generating or ending at the airport, and without an airline arriving to exploit that traffic, the airport will never be a hub.
“It will be a cargo hub.”
Another common belief is that any available runway (even an abandoned airport) can be converted into a cargo hub. The great majority of world air cargo is shipped in the belly hold of passenger aircraft. It is actually the passenger network system that allows cargo owners and shippers to distribute goods to a variety of destinations. The economies of scale required to make a cargo-only airport feasible are present at a handful of airports worldwide—most of which process cargo that is mainly origin and destination. While some perishable goods are often air shipped in large volumes, generating substantial full freighter activity, this is not enough to support the operation of an entire facility. Unless there are substantial levels of imports or exports originating from or destined for a particular airport, the presence of better infrastructure is not enough to develop a cargo airport.
“It will be a low cost carrier airport.”
Another elusive, golden egg-laying goose is the low cost carrier (LCC) airport. The LCC formula is based mainly on short haul flights, low cost facilities, high volumes of traffic, and minimum time on the ground, among other features. For example, flights over five hours create problems for LCCs due to longer turnarounds, the need for in-flight catering, and in particular crew requirements (such as the need to station crew at one end of the segment). Unless they come in large volumes, LCCs are not great clients to airports: they need low cost facilities because they spend little time on the ground, they don’t spend on aircraft parking fees, avoid using boarding bridges, and hardly consume in-flight catering. Their passengers do not spend much money at the airport, and there is limited dwell time since they don’t connect. Ultimately, LCCs need a defined market— passengers traveling between city pairs—on a high load factor basis throughout the year. Unless the airport can offer large volumes of traffic, the derived revenues from hosting a few LCC flights may not be significant.
“We will attract MROs (maintence, repair, and overhaul)”
Among the diverse fantasies many policymakers have is that the development of an airport will be financed by MROs. This is grounded in the belief that dormant airports or airports with very low activity can be used as maintenance facilities to repair airliners. Airlines use MRO facilities to perform maintenance and repair for aircraft. Airlines prefer to repair their aircraft at airports where they normally fly, so they don’t have to ferry the empty aircraft for repair. Of the four different types of repair checks, only the most comprehensive (that occurs once every five or six years) may justify flying an empty aircraft to separate MRO facilities. Equally, MRO operators prefer to be based at active airports where they can also take care of unexpected repairs of scheduled flights, a line of business that can be very profitable. Most importantly, an MRO will be based where highly skilled workers can be easily found and trained, alongside laws favorable to import duties and custom bonded inventories. Available space and good infrastructure, while useful for an MRO, is not enough to attract MRO operators. They need natural traffic activity, a concentration of home-based aircraft, and a good location close to skilled staff, services, and other potential customers.
Adapted from the forthcoming Airport development through public-private partnerships: A practical guide for policymakers (Ricover, Delmon and Cuttaree, PPIAF and World Bank).