The pace of privatization climaxed in 2007, with the full or partial privatization of Aéroports de Paris, including the Charles de Gaulle and Orly in Paris, Hong Kong, Amsterdam, and Calcutta. The 2008 financial collapse has not done much for the pace of privatizations, but even with a stable economy, it appears that most of the obvious targets for privatization have been captured … except for the United States.

The unique financial structure of U.S. airports, which provides for government funding for infrastructure through the FAA Airport Improvement Program (AIP), access to cheap funds through the ability to issue tax free bonds, and use of passenger facility charges, has generally thrown a wet blanket over complete privatizations of U.S. airports. Furthermore, AIP limitations specifically prohibit grantees from redeploying funding to non-airport purposes, effectively stifling the idea of providing returns to airport investors. The FAA’s Airport Privatization Pilot Program (APPP) appeared in 1996, which provides a path to privatization.

After six years of fits and starts including the withdrawal or termination of six applications as well as the 2000 privatization and subsequent 2007 deprivatization of New York’s Stewart Airport, when control was transferred to the Port Authority of New York and New Jersey, APPP is beginning to see some results with the July 19, 2012, selection of private operator Aerostar, a consortium of Mexican private operator ASUR (Aeroportuario del Sureste) and U.S. private equity firm Highstar Capital to lease and operate Puerto Rico’s Luis Muñoz Marín International Airport.  Privatization of Chicago’s Midway Airport received approval in 2008, but investors were unable to secure funding in the wake of the Lehman Brothers meltdown. This privatization is being revived. The APPP provides for privatization of only one “large hub” (airport with 1% of total annual passenger enplanements),such as Midway, blocking further complete privatizations of the most important U.S. airports.

The generally unfavorable results of the APPP contrast with broad and successful history of partially privatized airports – the prevailing model in the United States. A study of 35 European airports found significantly better financial returns for these hybrids when compared with fully privatized airports.[1]   According to the paper, “The increased operating efficiency of fully privatized airports does not result in higher returns on shareholders’ funds. In terms of cost efficiency, revenue generation, and financing of their capital structure, partially privatized airports appear to combine the best of both worlds.”

Given such a track record, it’s hardly any surprise that full privatization of U.S. airports has made any significant progress toward supplanting the prevailing U.S. model of partial privatization and public-private partnerships.

“Broadly, PPP refers to arrangements, typically medium to long term, between the public and private sectors whereby part of the services or works that fall under the responsibilities of the public sector are provided by the private sector, with clear agreement on shared objectives for delivery of public infrastructure and/ or public services. It typically does not include service contracts or turnkey construction contracts, which are categorized as public procurement projects or the privatization of utilities where there is a limited ongoing role of the public sector.”

PPPA’s announcement of the SJU deal suggests a total economic value of $2.6 billion with $1.9 billion of that originating with private sector investment. Detail available from the Internet[1] suggests a 2012 EBITDA of $40-$60 billion for the airport. This implies an EV-to-EBITDA ratio of 31.7 to 47.5, far in excess of the 17.25-to-17.5 average revealed in two academic works on the subject,[2] and well above recent S&P 500 price-earnings ratios, which have hovered around 16.5.

The San Juan experience represents an important milestone as the first major privatization of a U.S. airport. Whether it demonstrates an ability to capture any or all of the indicators of success described cited previously, the path to this privatization took less than three years from inception to the July 19^th announcement of the ASUR/Highstar consortium.

The ability to achieve this success in part must attribute to the existence of Puerto Rico’s Government Development Bank and its subsidiary, the Public-Private Partnerships Authority (P3A), organizations atypical in the 50 states and the District of Columbia. P3A is Puerto Rico’s central authority in charge of all procedures involved in the creation of PPPs, including identifying projects, requesting proposals, selecting partners, negotiating contracts and monitoring contract compliance. More typically, such activities fall under the control of agencies charged with planning, designing, and building infrastructure.  The result is often a bias for construction as a solution to problems.[3] Such is not the case with Puerto Rico’s P3A, which is wholly focused on implementing public-private partnerships in various sectors.

The uncertainty of the euro, contributed to a nearly 10% decline in the value of the currency versus the US dollar.  This contributed to increased foreign travel to many of Europe’s most popular destinations, such as Italy, Spain and France.  The latter is the top tourist destination in the world, with 79.5 million international visitors in 2011, according to UNWTO. (The US was a distant second with 62.3 million.)

Despite high airfares, US residents’ hotel occupancy in France for July 2012 increased 10.8% over July 2011 levels, according to data provided by the French Ministry of Tourism.  This level was only exceeded by China, which generated a 14.5% increase.  In contrast, economic uncertainty hampered visits to France from Spain and Italy, which saw occupancy rates tumble by 16.5% and 12.9%, respectively.  Part of this decline was due to “gloomy” weather in July, which would have more impact on short trips from neighboring countries than from North America.

For travelers from the BRICs and North America, from which trips require more advance planning, weather tends to be less of a factor. With the Euro’s strength decreasing around the world, foreigners that have not been able to afford to visit Europe in the past are now getting their chance. According to the French Tourism Ministry, Chinese tourists to France increased by 14.5% in July 2012. Between 2008 and 2010 visitors from the BRICs increased by 23.4% — with Brazil and Russia, demonstrating increases exceeding 70% and 50%, respectively. While these percentage gains are startling, the nominal increases are relatively modest. Canada, by the way, revealed a 23.4% increase in visitors to France during the same two-year period, reflecting that country’s increasing wealth from natural resources exploitation and concurrent currency strength.

While the BRIC’s percentage gains are startling, the nominal increases are relatively modest.  In 2010, visitors to France from all BRIC countries represented 80.1% of the total coming from the US. Nevertheless, these statistics support a new reality in the nature of European tourism, with important long-term implications for air transport.

Between 2000 and 2011, average fares increased over 73% for both the Delta and US Airways DCA-LGA shuttle.  Despite those increases, average daily revenue decreased by 63% for DL and 43% for US over the same period, implying average annual declines of 7.8% and 4.5%, respectively.

Recent coverage in the New York Times highlighted Amtrak’s success at pulling market share from the airlines. (“Frustrations of Air Travel Push Passengers to Amtrak,” August 15, 2012.)  While Amtrak has made heroic improvements and concurrent increases in Northeast Corridor traffic, the story is a bit more complicated than rail versus air.  Numerous forces have driven passengers to Amtrak, but also to an increasingly competitive intercity bus market.

The graph below shows combined Delta and US Airways Washington-New York shuttle traffic contrasted with Amtrak traffic for calendar years 2000-2011.

A few interesting things pop up out of this trend.   Rail is decidedly picking up market share – at least, that is, when one defines the market as being divided between air and rail. Going beyond share and looking at absolute numbers, it becomes clear that while the DCA-LGA air market has been averaging double-digit declines between 2000 and 2011, the rail market has been relatively flat, increasing only 5.3% between 2008 and 2011. This is hardly a stampede to rail.

Looking a bit further, however, something funny seems to be happening.  When the nosediving traffic levels of the two DCA-LGA shuttles are combined with Amtrak’s relatively flat Washington-New York volumes, we see total air/rail traffic level declining at an average 3.2% annual rate between 2000 and 2011.  While telecommuting, electronic communications, and economic recessions may have curtailed travel, it’s highly unlikely the 401,272 decline (32.3%) in air and rail trips results in trips not taken.

Of course, this picture is missing other modes, such as the bus.  An explosion in curbside bus services in recent years has generated a wave of new competition by providers such as Coach USA’s Megabus, Boltbus (a joint product of Greyhound and Peter Pan Lines), DC2NY, Vamoose (the Hasidic bus), and Chinese buses, NYDCExpress, and Washington Deluxe.

How big is bus ridership between Washington and New York?  Unfortunately, the bus industry (like Amtrak) is not forced to provide streams of origin and destination data to feed hungry analysts.  (The Amtrak data in the above chart reflect implied levels based on their reported share of the Washington-New York air/rail market.)

Jetstream was able to get some figures from Megabus, a subsidiary of UK’s Stagecoach Group.  They indicate an annual one-way flow of 556,500 passengers between Washington and New York.  For the other seven principal carriers, we looked at current schedules and seating capacities for seven bus operators between Washington (or its suburbs) and New York.  Assuming a 75% load factor, implied one-way annual passenger loads equate to 1.6 million, representing 65.2% of the total air/rail/bus market between the two cities.

With nearly two-thirds of the market, bus is hardly a footnote in the tale of Washington-New York passenger demand.  And the rest?  Rail gets 26.1% of the market.  The two shuttles account for a mere 8.7%.

Data provided by Megabus suggest the bleeding is not only coming from Amtrak.  Megabus reports that 9% of their passengers in 2009 previously would have gone by air.  By 2011 that figure had grown to 14% — the same percentage that shifted from rail to bus. (Diversions from automobiles comprise most of their market.) There is little reason not to expect this trend to continue.  Air service in the congested Northeast is not becoming any more certain.  Passengers have voted with their feet and demonstrated they are content with a longer trip as long as they can be amused with the Internet.

The story isn’t simply that air passengers are switching to rail.  The reality is – as one bus company executive told us:  “With the advent of curbside services, Amtrak is bleeding badly.” As evidence of this he noted that Amtrak selectively lowered its fares to compete with the bus during last Christmas – a period of peak travel.

The article cites fees of as much as $20C per passenger for air traffic control and a $30-per-passenger fee for Calgary passengers, which is being used to finance a new $1 billion runway.  A recent study by Omar Sherif Elwakil, Robert J. Windle, and Martin E. Dresner at the University of Maryland  (“Transborder Demand Leakage and the U.S.-Canadian Air Passenger Market”) found that taxes and fees account for 17-37% of the fare differential between Canada-US routes and domestic US routes.  That analysis suggests cross-border leakage cost airlines $1.8 billion dollars in 2008.

According to the WSJ item, the over-the-border bleeding has resulted in a 200% increase in departing passengers from Plattsburgh, NY, between 2007 and 2011 and a 965% increase from Niagara Falls during the same period. The huge percentage swings of course, reflect the tiny size of these facilities. Burlington, Vermont, 96 miles (154 km) from Montreal, which has a longer history as a Canadian surrogate, has seen its nonstop capacity increase by over 81% between summer 2009 and summer 2011.

These items raise some important issues, but the problems for Canadian passengers run a bit deeper than high fares to the United States. As a case in point, let’s look at Québec City. With a metropolitan population of over 750,000, it is the eighth largest in Canada. Founded in 1608 by Samuel de Champlain, it is a UNESCO World Heritage City and is presently the only walled city in North America.  Readers of Condé Nast Traveler rank Québec City as the number one city to visit in Canada. National Geographic Traveler convened 419 experts to rank World Heritage sites with respect to various criteria related to attractiveness, integrity, and management. Québec City was ranked sixth. The Québec region received over 4.5 million visitors in 2010. Although the city attracts massive amounts of tourists from around the world, air travel options to this gem are unimpressive.

Presently, Québec City’s Aéroport international Jean-Lesage de Québec (YQB) offers nonstop service to three large cities: Toronto (782 average seats per day), Montreal (678 seats per day), and Ottawa (62 seats per day), although, with the exception of WestJet’s daily 737 service to Toronto, it all is in regional jets.  The balance of its domestic service is on small to various outposts scattered around the province. Departures to the United States are limited to regional jets serving Chicago (100 seats per day), Philadelphia (150 seats per day), Detroit (83 seats per day), and Newark (197).  There is no service to a certain behemoth gateway in Queens, New York. All told, US capacity is responsible for 21% of YQB’s monthly departures. Added to the mix are Air Transat’s 22 monthly departures to Paris and Marseille, which account for 7% of YQB’s available seats and 34% of its ASMs.

A three-hour drive from the US border, Québec is more protected from leakage to Burlington and Plattsburgh than Montreal, but that city has far worse connectivity than its larger neighbor to the south.  Montreal (YUL) has nearly 5,800 daily seats headed to Atlanta, Boston, Chicago, Cleveland, Charlotte, Dallas-Ft. Worth, Ft. Lauderdale, Las Vegas, Los Angeles, Orlando, Miami, Minneapolis-St. Paul, New York (all three airports), Philadelphia, San Francisco, and Washington. Metropolitan Montreal may be five times the size of the Québec metropolitan area, and it may be an easy hop from Burlington or Plattsburgh, but it has more than 20 times the average daily capacity to the US and that capacity is headed to more airports.

For travel to Canadian destinations, Montreal offers more than four times the number of daily seats leaving for large cities as Québec. It also serves Calgary, Winnipeg, Vancouver, and Halifax.

As Québec is the most popular Canadian city with readers of Condé Nast Traveler, Charleston, South Carolina, ranks as the most popular US tourist city. In other ways, Charleston represents a good benchmark against Québec.  The populations of these charming and well-preserved colonial cities are similar; the 2010 US Census reports the population Metropolitan Charleston, North Charleston, and Summerville as 664,607 – a bit shy of metropolitan Québec’s 753,000.

While Québec is a UNESCO World Heritage city, Charleston has repeatedly been identified as a candidate for that cherished status.  Were it not for a US law that essentially entire cities or large swaths of cities from inscription on the World Heritage list, it likely would have been there years ago.  Both the advisory body US/ICOMOS and the City of Charleston are pursuing a path to inscription. Further, both cities are cruise destinations, with Charleston receiving 165,000 passengers in 2011, while Québec saw half as many.

Despite the similarities and Québec’s larger size, in 2011, Charleston International Airport reported 2.5 million enplaned and deplaned passengers, versus the 1.3 million for Jean-Lesage International Airport by Statistics Canada. These statistics imply that for every resident of metropolitan Charleston 3.79 air trips were generated — 219% of the 1.74 trips per capita generated by Québec. With 54% fewer enplanements and deplanements per capita, Québec is woefully underserved when compared with Charleston.

Cross-border leakage is a problem for Canadian airports, but something else is going on in Québec City.  For this alluring city, which is so dependent on tourist dollars (or Loonies),  poor connectivity with Canada, as well as the US, has unfortunate economic consequences.

Yet, London’s Heathrow Airport, the third largest airport in the world, has reached its practical capacity. In order to meet the new service needs, Heathrow replaces flights to short-haul destinations with flights to Hyderabad, Bangalore, and Guangzhou. This shift away from domestic service leads to a more isolated London and a weaker UK economy outside of the metropolis. London needs infrastructure improvements to keep up with the rapidly changing world, but noise-fearing Londoners will not allow them to be at Heathrow.

While other European markets are increasing their service to the BRIC countries, Heathrow has actually shrunk its service slightly over the last five years. In order to combat the problem, the BAA wants to build a third runway at Heathrow, an idea backed by business groups and British Airways. City residents, however, cite an already loud noise problem getting worse with more flights overhead. Another option is a third airport, but with the UK’s fiscal tightening, this option seems too expensive, too risky, and possibly unhelpful except to divert a portion of local traffic.  It would have very little impact maintaining London’s position on the global forefront of transportation.

Meanwhile, London no longer must only compete with New York or other European markets. Dubai, Singapore, and Hong Kong, for instance, all have large airports with room for growth.  The UAE is perhaps the most successful to date with airports and airlines growing at tremendous rates while the western world’s major carriers contract.  In the past 5 years, Abu Dhabi International Airport has more than doubled its passenger traffic to 12m while Dubai announced a 7.8 billion dollar expansion program that will take DXB from a capacity of 60 million passengers to 90 million by 2018.

Globalization clearly benefits London, reviving its financial sector with international business. But an outdated Heathrow could hold it back from remaining at the world’s center. A city like Dubai, with its uncontested efforts to make it the most convenient port to the entire world, could take that title (Dubai can already directly connect any two big cities in the world). London clearly needs a cost-effective improvement to its infrastructure – a third runway at Heathrow is a start.  There is unquestionably a trade-off in building in a dense area such as London, but there is also a “Cost of doing nothing” that should be contemplated.