Should Governments Lease Their Airports?

SHOULD GOVERNMENTS LEASE

THEIR AIRPORTS?

b

y Robert W. Poole, Jr.

August 2021

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EXECUTIVE SUMMARY

The Covid-19 recession has put new fiscal stress on state and local governments. One tool

that may help them cope is called “asset monetization,” sometimes referred to as

“infrastructure asset recycling.” As practiced by Australia and a handful of U.S. jurisdictions,

the concept is for a government to sell or lease revenue-producing assets, unlocking their

asset values to be used for other high-priority public purposes.

This study focuses on the potential of large and medium hub airports as candidates for this

kind of monetization. Under federal airport regulations, governmental airport owners are

not allowed to receive any of an airport’s net revenue; all such revenues must be kept on

the airport and used for airport purposes. Overseas, there are no such restrictions. Over the

past 30 years, numerous governments have corporatized or privatized large and medium

airports and received direct financial benefits from doing so.

In 2018, as part of legislation reauthorizing the Federal Aviation Administration, Congress

created an important exception to the long-standing restriction. The new Airport

Investment Partnership Program (AIPP) enables governmental airport owners to enter into

long-term public-private partnership (P3) leases—and use the net lease proceeds for

general governmental purposes.

This study explores the potential of airport P3 leases for 31 large and medium hub airports

owned by city, county, and state governments. It draws on data from dozens of overseas

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airport P3 lease transactions in recent years to estimate what each of the 31 airports might

be worth to investors. The gross valuation is what the airport might be worth in the global

marketplace. The net valuation takes into account a U.S. tax code provision that requires

existing airport bonds to be paid off in the event of a change of control, such as a long-

term lease. Hence, the net value estimate is the gross value minus the value of outstanding

airport bonds.

Since P3 leases of airports are uncommon in the United States (the only existing example is

the San Juan, Puerto Rico airport), the study explains three categories of likely investors in

U.S. airports. First is a growing universe of global airport companies, including the world’s

five largest airport groups, which operate a growing share of the world’s largest airports by

annual revenue. The second is numerous infrastructure investment funds, which have

raised hundreds of billions of dollars to invest as equity in privatized and P3-leased

infrastructure facilities worldwide. The third category is public pension funds, which are

gradually expanding their investments in infrastructure in an effort to reverse declines in

their overall rate of return on investments. All three types of investors have long time

horizons and are comfortable investing in and further developing these kinds of assets.

The study explains that proceeds from the lease of a major infrastructure asset such as an

airport should be used to strengthen the jurisdiction’s balance sheet, rather than using such

a windfall for short-term operating budget needs. It explains and provides examples of

three potential uses:

• Invest the proceeds in needed but unbudgeted infrastructure;

• Use the proceeds to pay down existing jurisdictional debt; and/or

• Use the proceeds to reduce the jurisdiction’s unfunded pension system liabilities.

On the latter point, the study compares the net airport P3 lease proceeds with each

jurisdiction’s unfunded pension system liabilities. It identifies several jurisdictions where

the estimated net airport lease proceeds exceed total pension system liabilities, a number

of others where the proceeds could significantly reduce those liabilities, some where the

liabilities are so large that airport lease proceeds would have only a modest impact, and a

handful where there would not likely be an airport lease, unless investors valued those

airports higher than the conservative numbers used in this study.

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The relative attractiveness of using lease proceeds for each of these purposes will likely

depend on specifics of the city, county, or state in question. A government with a pressing

need for a major unfunded infrastructure facility may find that use the most attractive,

while a jurisdiction where unfunded pension liabilities threaten either large tax increases

or something akin to bankruptcy may prefer using an airport windfall to shore up its

pension system.

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TABLE OF CONTENTS

PART 1 INTRODUCTION ....................................................................................................................................... 1

PART 2 CHANGED AIRPORT GOVERNANCE SINCE 1987 ................................................................................. 4

2.1 THE EVOLUTION OF AIRPORT GOVERNANCE MODELS ........................................................................ 4

2.2 EMERGENCE OF A GLOBAL AIRPORTS INDUSTRY .................................................................................. 6

2.3 HOW DO INVESTOR-FINANCED AIRPORTS DIFFER FROM GOVERNMENT-RUN AIRPORTS? .. 9

2.4 P3 TRANSFORMATION OF SAN JUAN INTERNATIONAL AIRPORT .................................................. 14

PART 3 WHAT ARE MAJOR U.S. AIRPORTS WORTH? ..................................................................................... 17

3.1 HOW INVESTORS VALUE INFRASTRUCTURE SUCH AS AIRPORTS ................................................. 17

3.2 SELECTED U.S. AIRPORTS AND THEIR ESTIMATED VALUATIONS .................................................. 19

3.3 THE 30 AIRPORTS, IN BRIEF ......................................................................................................................... 24

3.4 NEGOTIATING A P3 LEASE WITH AIRLINES ............................................................................................. 30

PART 4 WHAT KINDS OF TEAMS WOULD BID? ............................................................................................... 33

4.1 OVERVIEW ............................................................................................................................................................ 33

4.2 AIRPORT COMPANIES ...................................................................................................................................... 34

4.3 INFRASTRUCTURE INVESTMENT FUNDS ................................................................................................. 36

4.4 PUBLIC PENSION FUNDS ................................................................................................................................ 38

PART 5 PENSION FUNDS AS AIRPORT INVESTORS ........................................................................................ 40

5.1 THE TWO-FOR-ONE ASPECT OF PENSION FUNDS AND INFRASTRUCTURE P3S ...................... 40

5.2 PENSION FUNDS AND THE POLITICS OF AIRPORT P3 LEASES ....................................................... 42

5.3 ADDRESSING THE JURISDICTION’S OWN PENSION SYSTEM SHORTFALLS ................................ 43

PART 6 WISE USE OF P3 LEASE PROCEEDS ..................................................................................................... 46

6.1 OVERVIEW ............................................................................................................................................................ 46

6.2 INVESTING IN OTHER NEEDED INFRASTRUCTURE .............................................................................. 47

6.3 PAYING DOWN GOVERNMENT DEBT ......................................................................................................... 49

6.4 REDUCING UNFUNDED PENSION SYSTEM LIABILITIES ...................................................................... 50

PART 7 CONCLUSIONS ....................................................................................................................................... 53

PART 8 APPENDIX: AIRPORT FACTORS AFFECTING P3 POTENTIAL............................................................ 55

ABOUT THE AUTHOR ...................................................................................................................................................... 60

TABLES

Table 1: The Largest Investor-Owned Airport Companies ........................................................................................................ 7

Table 2: 31 U.S. Large and Medium Hub Airports ...................................................................................................................... 19

Table 3a: Data Used to Estimate Airport’s Value ($USD) ......................................................................................................... 21

Table 3b: Estimated Airports’ Gross and Net Values ($USD) .................................................................................................. 22

Table 4: Airports Grandfathered to Divert Some Revenue ...................................................................................................... 30

Table 5: Teams Invited to Give St. Louis Airport Presentations ............................................................................................ 34

Table 6: World’s 10 Largest Infrastructure Investment Funds, 2019 .................................................................................. 37

Table 7: Airport Net Value vs. Jurisdiction Unfunded Pension Liability ............................................................................. 44

Table A-1: Airports Ranked by 2019 Domestic Passenger Share .......................................................................................... 56

Table A-2: Airports Ranked by 2019 Non-Aeronautical Revenue ......................................................................................... 57

Table A-3: Selected Airports Ranked By Airlines Capacity Recovery ................................................................................... 58

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INTRODUCTION

Across the United States, many airports are owned and operated as departments of city,

county, or state governments. Airports are highly valuable business enterprises, linking

cities to other cities across the country and, directly or indirectly, around the world. Airports

serve passengers but also move a vast amount of high-value cargo.

In many countries, governments have restructured airports as commercial real estate

assets, enabling airports to attract investment capital on their own economic merit. These

changes have enabled larger airports to generate net revenues for their government

owners, in addition to the economic benefits they create for their state and metro area.

In many countries, governments have restructured airports as

commercial real estate assets, enabling airports to attract

investment capital on their own economic merit.

But that is not the case in the United States. All commercial airports in this country receive

federal Airport Improvement Program (AIP) grants. One condition of these grants is that all

airport revenues must remain on the airport and be used only for airport purposes.

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Therefore, the governmental owner of a U.S. commercial airport cannot receive any direct

financial benefit from that airport. In financial terms, the government owner’s return on the

airport’s equity is zero.

Actually, there are two little-known exceptions to the above restriction. When Congress

first authorized AIP grants, it “grandfathered” a handful of airports that had a long history

of diverting net airport revenues to their government owners. Of the 12 that were originally

grandfathered, only nine airport sponsors (including the Port Authority of New York and

New Jersey) are still covered by this exception.

1

On the other hand, all commercial airports

were given a new option in 2018, when Congress enacted the most recent reauthorization

of the Federal Aviation Administration (FAA). A new section of that legislation—the Airport

Investment Partnership Program (AIPP)—permits governmental airport owners to enter into

long-term public-private partnership (P3) leases of their airports. The net lease proceeds

can be retained by the governmental airport owner and used for general governmental

purposes.

… all commercial airports were given a new option in 2018, when

Congress enacted the most recent reauthorization of the Federal

Aviation Administration (FAA). A new section of that legislation—

the Airport Investment Partnership Program (AIPP)—permits

governmental airport owners to enter into long-term public-private

partnership (P3) leases of their airports.

Many city, county, and state governments are not familiar with this recent development. It

is also unlikely that they know the market-based asset value of the airport or airports they

own—and could potentially lease under the provisions of the new AIPP. Yet this concept

has been used overseas for several decades, as countries have changed their governance

models for large and medium commercial airports.

1

Miller, Benjamin M., et al. “U.S. Airport Infrastructure Funding and Financing.” RAND Corporation, 2020.

Chapter 3. 36.

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Leasing revenue-producing assets (such as airports) and using the lease proceeds for other

governmental purposes is sometimes known as “asset monetization” or alternatively as

“infrastructure asset recycling.” In many such cases the net present value of a long-term

(e.g. 50 years) stream of lease payments is paid to the government up-front. Wise policy

calls for such sums to be used for balance-sheet purposes, rather than for short-term

budget balancing. Well-run governments invest a one-time windfall such as this in paying

down outstanding debt, shoring up under-funded pension systems, or on large-scale (and

otherwise unfunded) infrastructure.

This report explores the potential of long-term P3 leasing of airports owned directly by

city, county, and state governments in the United States. Subsequent sections discuss how

airport governance has changed worldwide over the past three decades, the emergence of

global airport companies, how airports and other revenue-producing infrastructure are

valued by investors, what 31 large and medium U.S. airports might be worth, what kinds of

entities are interested in bidding on airport P3 leases (including the emerging role of public

pension funds), and some further thoughts on wise use of the proceeds.

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CHANGED AIRPORT

GOVERNANCE SINCE

1987

THE EVOLUTION OF AIRPORT GOVERNANCE MODELS

Prior to 1987, nearly all the world’s commercial airports were organized as departments of

government, in many cases (e.g., Canada and the U.K.) as departments of the national

government. That changed dramatically in the U.K. in 1987 as part of the Thatcher

government’s wide-ranging privatization of state-owned enterprises. Utilities such as

electricity, water, natural gas, and telephone systems were sold to investors, with shares

traded on stock exchanges. The same process was applied to the British Airports Authority

(BAA), which owned and operated the three major London airports (Heathrow, Gatwick, and

Stansted) and several Scottish airports. In 2009, to promote competition, the government

required privatized BAA to sell off Gatwick, Stansted, and the Scottish airports, which are all

now owned and operated by other investor-owned companies.

In the decades since then, most other large European airports have also undergone changes

in governance. A few others were sold outright, à la BAA (e.g. Brussels, Copenhagen), but

more common has been the sale of part of the equity to investors with governments

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retaining the balance. This is the model used in France for Aeroports de Paris and in

Germany for airports including Frankfurt, Düsseldorf, Hamburg, and several others.

A different model has emerged in Australia, Asia, other parts of Europe, and Latin America.

Countries in these regions have embraced the long-term public-private partnership (P3)

lease model. Australia applied this to nearly all its major airports around the turn of the

century, offering 50-year leases with 49-year renewal options. Major countries in Latin

America followed suit, with Argentina taking the lead, followed by Brazil, Chile, Colombia,

Mexico, and Peru, among others. In Asia, the governments of India, Japan, Malaysia, and the

Philippines are among those opting for the long-term P3 lease model.

In 2018, Airports Council International, the global airports trade association, published a

detailed study on private investment in airports.

2

ACI’s research found that in several

regions more than half of all airline passengers were being served by airports with majority

private-sector investment. The regional totals were as follows:

Africa 11% of passengers

Asia-Pacific 47%

Europe 75%

Latin America/Caribbean 66%

Middle East 18%

North America 1%

The change to significant investor involvement in airport

management and governance has led to more-robust financing.

The change to significant investor involvement in airport management and governance has

led to more-robust financing. The ACI report noted that the changed governance model has

enabled large increases in airport capital improvements. These include new terminals at all

2

Airports Council International. “Policy Brief: Creating Fertile Grounds for Private Investment in Airports.”

January 2018.

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three major London airports (Gatwick, Heathrow, Stansted), Frankfurt, Lisbon, Paris, Lima,

Santiago, Sydney, Melbourne, etc. Private capital has also been invested in runway

additions at airports including Bogotá, Frankfurt, Vienna—and potentially London Heathrow

(approved by Parliament but being opposed by local and environmental litigation).

ACI also compared traditional and investor-financed airports during 2012–2016 and found

that capital expenditure per workload unit was $4.76 at traditional airports vs. $5.40 at

investor-financed airports. This is noteworthy because it shows that private investors with a

long time horizon are willing to continue investing in their airports’ further development

even after the initial capital outlay to lease the airport.

EMERGENCE OF A GLOBAL AIRPORTS INDUSTRY

The change in government policies that facilitated large-scale investor involvement has led

to the emergence of a global industry of airport companies. Many of these companies

evolved from airports that were partially or wholly divested from governments, such as

Fraport (begun with Frankfurt), Aeroports de Paris (begun with the three Paris airports),

Aena Aeropuertos (begun with the main airports of Spain), and Heathrow Airport Holdings.

Others have been created either by infrastructure development companies (e.g., Vinci

Airports) or by infrastructure investment funds.

The change in government policies that facilitated large-scale

investor involvement has led to the emergence of a global industry

of airport companies.

Table 1 lists the 38 global airport companies that are among the top 100 airport operators

(by revenue) in 2018.

3

The five largest airport groups worldwide are all partially or wholly

owned by investors, with the largest—Aeroports de Paris—still 50.6% government-owned,

with its planned 2020 privatization deferred until after the Covid-19 recession. The total

3

“Airport Group Financials.” Flight Airline Business. November 2019.

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2018 revenue of all 100 top airports was $98.5 billion, and the 38 with significant investor

ownership accounted for nearly 49% of the total, at $48 billion. This is a sizable industry

that has grown from zero in 1986. Few Americans have been aware of this new industry as

it has emerged over the past 34 years.

TABLE 1: THE LARGEST INVESTOR-OWNED AIRPORT COMPANIES

Airport Company

Global

Rank

HQ Country

Main Airport(s)

2018

Revenue

($M)

Privatiz.

Status

2019

Skytrax

Rank

Aeroports de Paris

1

France

Paris-DeGaulle

5,270

Partial

30

Aena Aeropuertos

2

Spain

Madrid

5,088

Partial

35

Fraport

3

Germany

Frankfort, Lima

4,093

Partial

12 & 47

Heathrow Airport Holdings

4

UK

Heathrow

3,945

Full

8

Vinci Airports*

5

France

Gatwick, Lisbon

2,860

Full

55 & 60

New Kansai Intl. Airport

12

Japan

Kansai

1,985

Full

11

Airports of Thailand

13

Thailand

Bangkok

1,924

Partial

46

Beijing Capital Airport

17

China

Beijing

1,698

Partial

72

TAV Airports

20

Turkey

Istanbul

1,430

Full

Atlantia

24

Italy

Rome

1,208

Full

82

Malaysia Airport Holdings

25

Malaysia

Kuala Lumpur

1,202

Partial

54

Flughafen Zürich

26

Switzerland

Zürich

1,180

Partial

Sydney Airport

27

Australia

Sydney

1,178

Full

21

Guangzhou Baiyun

28

China

Guangzhou

1,167

Partial

39

Manchester Airports

29

UK

Manchester

1,163

Partial

Flughafen Wien

36

Austria

Vienna

941

Full

19

SEA Group

39

Italy

Milan

839

Partial

Corporación Americas

41

Argentina

Buenos Aires

822

Full

ASUR

43

Mexico

Cancún

800

Full

Australia Pacific Airports

44

Australia

Melbourne

782

Full

23

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Airport Company

Global

Rank

HQ Country

Main Airport(s)

2018

Revenue

($M)

Privatiz.

Status

2019

Skytrax

Rank

GMR Airports

47

India

Delhi

755

Partial

59

GAP

48

Mexico

Guadalajara

733

Full

Brussels Airport Co.

51

Belgium

Brussels

701

Full

Copenhagen Airports

53

Denmark

Copenhagen

689

Partial

15

Brisbane Airport Corp.

55

Australia

Brisbane

600

Partial

18

Athens Intl. Airport

58

Greece

Athens

563

Partial

42

Düsseldorf Airport

60

Germany

Düsseldorf

558

Partial

31

Airports Co. S. Africa

65

South Africa

Cape Town

517

Partial

22

Auckland Intl. Airport

70

New Zealand

Auckland

486

Partial

27

Budapest Liszt Airport

71

Hungary

Budapest

450

Full

89

Perth Airport

77

Australia

Perth

404

Full

52

OMA

82

Mexico

Acapulco

351

Full

Aeroports de la Côte d'Azur

84

France

Nice

329

Partial

93

Hamburg Airport

88

Germany

Hamburg

317

Partial

28

AGS Airports

90

UK

Glasgow

283

Full

Edinburgh Airport

92

UK

Edinburgh

271

Full

SAVE Group

95

Italy

Venice

250

Partial

Birmingham Airport Holdings

100

UK

Birmingham

210

Partial

98

TOTAL

$48,042

Source: Flight Airline Business

In the right-hand column, Table 1 also notes which airport companies manage airports that

made the 2019 Skytrax passenger survey of the world’s 100 best airports. Twenty-six of the

38 companies had at least one airport in that top-100 list. The Skytrax top-100 airports list

includes only 12 U.S. airports, with the highest-ranked being: Denver (#32), followed by

Atlanta (#36), Cincinnati (#37), Houston Intercontinental (#38), and San Francisco (#38).

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HOW DO INVESTOR-FINANCED AIRPORTS DIFFER FROM

GOVERNMENT-RUN AIRPORTS?

There are many ways in which airports operated as commercial businesses differ from

traditional, government-operated airports. Here are six such differences.

2.3.1 CAREER AIRPORT MANAGEMENT

In many, but not all, government-run airports and other infrastructure, the senior

executives are political appointees, often from the ranks of existing administrative staff.

Their terms in office often coincide with the tenure of the mayor, county executive, or

governor. When this is not the case, long-term airport administrators may fully understand

the government’s way of operating, but may lack the aviation career experience of having

managed a number of airports.

… investor-financed airports generally hire and retain experienced

career airport managers, who are long-term hires, with

professional airport management skills and experience (often at

several different airports).

By contrast, investor-financed airports generally hire and retain experienced career airport

managers, who are long-term hires, with professional airport management skills and

experience (often at several different airports). Such people not only have more airport-

specific experience; they are also more likely to make and implement long-term plans.

Moreover, an airport company can pay market rates of compensation, since it is not

constrained by civil service regulations.

2.3.2 TYPE OF REGULATORY OVERSIGHT

In the majority of cases, there is only one commercial service airport in a metro area; when

this is the case, the airport operates as a monopoly in terms of air travelers who live in that

metro area. If the airport is operated by the relevant government agency (city, county, or

2.3

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state), the presumption is that it is operated in a way that does not exploit either its airline

customers or its passengers. But with some airports still allowing airport retailers to charge

very high prices, or giving incumbent airlines favored treatment, this premise is not always

accurate. Some economic regulation is also imposed by the FAA via its many “grant

assurances” that airports which receive federal AIP grants must comply with (including the

ban on revenue diversion mentioned previously).

A long-term P3 lease is a contractual framework that regulates and governs how the airport

is run. The lease agreement offers a wide range of parameters to be negotiated and agreed

upon between the government owner and the private investor group, but generally would

include at a high level:

• The payment made to the owner for the long-term lease;

• The further investment in and development of the airport that the private partner

commits to;

• The key performance indicators that the private partner is committed to delivering;

• The rates that can be charged to passengers and airlines (usually linked to inflation);

and,

• The revenue to be shared with the owner during the duration of the lease.

2.3.3 RELATIONSHIP WITH AIRLINES

In the decades before the 1978 airline deregulation law, airports were still viewed as a kind

of infant industry that needed stability in order to be able to sell long-term revenue bonds

for airport improvements such as runways and terminals. Consequently, airport owners

signed long-term lease-and-use agreements with anchor-tenant airlines. In exchange for

long terms, the airlines got a form of veto power over additions of terminal space that

would allow for the entry of competing airlines, especially ones that would charge lower

fares. Since airline deregulation became law, as these old leases expire, they are

increasingly being replaced by leases with shorter terms and in some cases without the

traditional exclusive-use gates and facilities that were formerly standard practice.

But in the U.S. these changes have not gone as far toward full airport control of gates and

facilities that we observe in most European airports and most investor-financed airports.

Those airports generally have common-use gates and other facilities that can be

dynamically assigned to specific airlines as needs change during the 24-hour day, and from

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season to season as airline schedules are adjusted. This policy also maximizes the use of

each gate, which is a costly resource. Airlines with significant international service are

familiar with operating in this kind of common-use environment.

2.3.4 FINANCING VIA EQUITY IN ADDITION TO DEBT

Government-run airports finance major capital projects solely via selling tax-exempt

revenue bonds to financially conservative investors. Those bond buyers put a premium on

low risk, so airports maintain large amounts of reserve funds and pledge large amounts of

revenue to ensure a high debt-service coverage ratio (e.g., 1.8 times annual debt service

payments). City, county, and state airport financial officers are accustomed to operating in

this financially conservative way.

Airport companies and the infrastructure funds that partner with

them to finance long-term P3 leases use a mix of equity and long-

term bonds to finance the acquisition and their capital programs.

Airport companies and the infrastructure funds that partner with them to finance long-term

P3 leases use a mix of equity and long-term bonds to finance the acquisition and their

capital programs. In an airport with strong growth prospects, they are willing to accept

somewhat greater financial risk in order to make needed facility improvements sooner. A

mix of equity and debt can withstand the reduced airport revenues that occur in times of

recession better than 100% debt financing. That is because only the bondholders must be

paid every year; in times of lower revenues, equity holders can wait (and by law,

bondholders have first priority to be paid). Equity investors seek returns on equity in the

low double digits to compensate them for the risks they take on. These include cost

overruns and late completion of new facilities, such as terminals and runways, as well as

reduced airport revenues during recessions or emergencies that disrupt air travel. By

contrast, at government-run airports, variable charges mean that airlines and passengers

bear the full risk of a recession or disruption because fees must be increased

proportionately to match revenues with costs. With a P3 lease, this risk can be transferred

to the equity investor by contractually agreeing to fixed charges, protecting airlines and

passengers from increased charges in times of difficulty.

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The evidence that this model works is documented in the ACI report noted previously: a

growing array of new terminals and a small number of new runways that have been

financed via equity and debt around the world.

A mix of equity and debt can withstand the reduced airport

revenues that occur in times of recession better than 100% debt

financing.

2.3.5 INCREASED ECONOMIC PRODUCTIVITY

It turns out that this kind of governance regime significantly affects the economic

productivity of an airport. One of the most detailed studies of this subject was published

more than a decade ago in the Journal of Urban Economics. A research team led by Tae Oum

of the University of British Columbia used a data set of 109 airports worldwide.

4

Of the

sample, 27 were owned and operated by a department of government, 25 by a U.S. airport

authority, 16 had majority investor participation, 12 were public-sector corporations, seven

were operated by U.S. multi-purpose port authorities, and the remainder had mixed

ownership. The researchers used an econometric technique that assesses the potential

airport outputs compared with its inputs to measure how much “bang for the buck” is

associated with each organizational form.

Overall, the researchers found that airports with majority investor control, as well as

airports operated as quasi-businesses (e.g., as government corporations or airport

authorities) are more economically productive than airports operated as departments of

government or by multi-purpose port authorities. This was measured in terms of factors

such as higher runway utilization and higher non-aeronautical revenue compared with

airport costs. The authors recommended that governments seeking a change in airport

governance should maximize investor involvement and should avoid multi-purpose port

authorities (which tend to use airport revenues for non-airport purposes, leaving the

airports with less-than-adequate facilities).

4

Oum, Tae, Jia Yan, and Chunyun Yu. “Ownership Forms Matter for Airport Efficiency: A Stochastic Frontier

Investigation of Worldwide Airports.” Journal of Urban Economics. Vol. 64, Issue 2. September 2008.

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Overall, the researchers found that airports with majority investor

control, as well as airports operated as quasi-businesses (e.g., as

government corporations or airport authorities) are more

economically productive than airports operated as departments of

government or by multi-purpose port authorities.

2.3.6 INCREASED PASSENGER-FRIENDLINESS

The earliest study on the passenger-friendliness of airports dates back to the first decade of

airport privatization. Researcher Asheesh Advani did his PhD dissertation at Oxford

University on this subject. He created a 50-item survey that was administered to airport

managers worldwide, aimed at measuring the extent of policies and features conducive to

passenger-friendliness. (Examples include conducting regular passenger surveys, having a

publicized way for passengers to file complaints, and adjusting staffing levels based on

passenger flow data.) Advani analyzed responses received from 201 airports in 67

countries, including 54 airports in the United States. The airports that responded included

14 with largely or entirely private ownership (in Austria, Denmark, and the U.K.) and 15

others operated under either lease or private contract management (in Cambodia, Canada,

France, Hungary, the U.K., and the United States). Advani’s main finding was that airports

with private-sector involvement had significantly higher passenger-responsiveness than

government-operated airports.

5

Far more recent are the ongoing results generated by Skytrax’s annual passenger surveys to

identify the world’s top 100 airports, as judged by airline passengers. As noted in the

rankings of airport companies in Table 1, the large majority of commercial airport

companies have airports in the 2019 Skytrax top-100 list, and that has been true for many

years. Those taking part in the Skytrax surveys tend to be international travelers, who are

likely to be more-frequent flyers than the average airline passenger. Hence, they have a

larger base of airport experience with which to make such judgments.

5

Advani, Asheesh. “Passenger-Friendly Airports.” Reason Foundation. March 1999. (Note: this report is

Advani’s summary of his PhD dissertation.)

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Should Governments Lease Their Airports?

14

Advani’s main finding was that airports with private-sector

involvement had significantly higher passenger-responsiveness

than government-operated airports.

A somewhat extreme example of a passenger-unfriendly U.S. airport was San Juan

International, as described in the excerpt (section 2.4 below) from an article by former New

York Times reporter John Tierney. His piece described how the long-term P3 lease of this

airport has addressed numerous problems that had plagued this airport.

P3 TRANSFORMATION OF SAN JUAN INTERNATIONAL

AIRPORT

In his article, “Making New York’s Airports Great Again,” John Tierney examines how a

public-private partnership transformed Puerto Rico’s San Juan International Airport:

6

Until four years ago, the Luis Muñoz Marin International Airport in San Juan had lots in

common with LaGuardia. It was run by an unwieldy bureaucracy, the Puerto Rico Ports

Authority, which neglected the airport while running up bills on its other unprofitable

projects in the island’s ports. The terminal was a confusing jumble of dim corridors, with

passengers enduring long waits to get through security or to pick up luggage. The stores

were tacky and the restaurants greasy spoons, often rented at bargain prices to politicians’

friends or relatives.

On rainy days, the ceilings leaked; on hot days, the air conditioning faltered. The floors of

the boarding bridges from the gates to the planes were riddled with holes. The bathrooms

were grimy, and it often took days or weeks to repair a broken toilet. … Some crucial tasks

didn’t get done at all such as maintaining the instrument landing system used to guide a

plane descending during bad weather. For years, pilots had to land their planes visually,

without positional guidance from radio signals, because the system’s antennae were blocked

by trees—and no one in the bureaucracy wanted to take responsibility for cutting them

6

Tierney, John. “Making New York’s Airports Great Again.” City Journal. Winter 2017.

2.4

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

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15

down. Airlines, unsurprisingly, switched operations to other Caribbean hubs, leaving the

airport with less revenue to pay bills, much less make capital improvements. …

The Ports Authority leased the airport in 2013 for 40 years to Aerostar, a partnership of

investors and a company [ASUR] operating airports in Cancún and other Mexican cities. The

new managers agreed to make capital improvements and to pay the Ports Authority $1.2

billion—half up-front and half over the course of the lease. They also promised to reduce

landing fees and keep them low in the future.

The result, just three years later, is an airport that nobody would call Third World. The

redesigned concourses are sleek and airy and easy to navigate. Passengers get through

security faster, thanks to a state-of-the-art system for screening bags. New boarding bridges

stand at gates. The duty-free shop now looks like an upscale department store, and revenue

from the new stores and restaurants has more than doubled. The renovated facilities and the

reduced landing fees have attracted more airlines to San Juan, and they have no trouble

getting access to gates—now controlled by the airport’s manager, not other airlines. The new

arrangements took some getting used to for the dominant airlines, but they’re reaping other

benefits. …

Under the Ports Authority regime, inexperienced political appointees directed the airport;

their jobs and plans lasted only as long as their party stayed in power. Now, the airport is

run by industry veterans, who take the long view because of their company’s 40-year lease.

The Aerostar executive in charge of the airport, Augustin Arellano, a former pilot with the

Mexican air force, is an aviation engineer with decades of experience overseeing airlines and

airports. “A knowledgeable professional like Augustin makes so much difference,” [Delta’s]

Luciano says. “With political appointees, you have to teach each new one how the airport

works, and it can take so long to get anything done. Now when there’s a problem with a

taxiway or a gate or a checkpoint, Augustin understands it and takes care of it right away.”

That’s exactly what Arellano did with the trees blocking the antennae needed to guide

planes landing in bad weather. Airport officials had been waiting eight years for bureaucrats

in Puerto Rico and Washington to decide which agency had the authority to remove them.

Arellano promptly resolved the impasse. “We went out there and cut down the trees

ourselves,” he says. “I knew we’d have to pay a fine, and we did—they made us plant two

trees nearby for each one we cut down. But we couldn’t wait any longer. We had to make

sure planes could land safely.”

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Should Governments Lease Their Airports?

16

“We’re trying to change the whole culture of the airport to focus on customer service,”

Arellano says. That’s brought more customers. The volume of passengers in San Juan has

been growing at four percent annually, well above the industry average. That increase is

good for Aerostar’s bottom line, of course, but it’s also a boon to Puerto Rico.

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Reason Foundation

17

WHAT ARE MAJOR U.S.

AIRPORTS WORTH?

HOW INVESTORS VALUE INFRASTRUCTURE SUCH AS

AIRPORTS

Infrastructure investors consider many factors when they assess possible investments in

revenue-producing infrastructure, whether this be railroads, pipelines, or electric and

natural gas utilities. In the United States, most of those entities are already in the private

sector and function fully as businesses. When investors consider a long-term P3 lease of a

facility that is currently owned and operated by a government, which they plan to make

operate more as a business, they assess both its current operations and financial

conditions, and also its potential for improvement as a commercial business.

For this kind of infrastructure acquisition, a widely used metric for assessing current value

is earnings before interest, taxes, depreciation and amortization (EBITDA). It provides a

measure of near-term operational performance as measured by operational cash flow.

Interest payments on existing debt are a significant factor in that cash flow, but

government-owned enterprises such as U.S. airports are generally exempt from taxation.

Depreciation and amortization are non-cash expenses.

PART 3

3.1

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Should Governments Lease Their Airports?

18

When investors consider a long-term P3 lease of a facility that is

currently owned and operated by a government, which they plan

to make operate more as a business, they assess both its current

operations and financial conditions, and also its potential for

improvement as a commercial business.

Acquirers of airports, seaports, toll roads, and other infrastructure use the facility’s current

financial statements to calculate its EBITDA. They develop valuation rules of thumb, based

on recent transactions for the type of facility, of what multiple of EBITDA investors that

won competitions agreed to pay. Thus, if a decade’s worth of seaport purchases or long-

term P3 leases averaged 10 times each facility’s EBITDA (written as 10X), then that would

be a good way to estimate such a facility’s acquisition price. (And for long-term leases, the

price would be about the same for a 50-year P3 lease and an outright purchase.) On the

other hand, an actual offer to lease the airport would be based on a more detailed study of

the specific airport and its potential under private management.

In a recent Reason Foundation study on infrastructure asset recycling, data assembled from

such transactions in the recent decade yielded the following average EBITDA multiples:

7

Airports 16X

Seaports 14X

Toll roads 26X

Parking facilities 22X

Water/wastewater 12X

Those numbers are averages across a set of transactions, with a range of values on either

side of the average, depending on the specifics of the facility in question. It should also be

noted that the short-term effects of the Covid-19 recession may reduce EBITDA multiples in

the short term, despite airports being long-term investments.

7

Poole, Robert W., Jr. “Asset Recycling to Rebuild America’s Infrastructure.” Reason Foundation. October

2018.

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Reason Foundation

19

SELECTED U.S. AIRPORTS AND THEIR ESTIMATED

VALUATIONS

For this study, 31 large and medium hub airports (as defined by FAA based on their annual

passenger volumes) were selected. Table 2 lists those airports and identifies the owner of

each. Fifteen are large hubs and 16 are medium hubs. Ownership breaks down as follows:

City government 19

County government 6

Joint city/county 2

State government 4

TABLE 2: 31 U.S. LARGE AND MEDIUM HUB AIRPORTS

Name

Code

Hub Size

City Owner

County Owner

State Owner

Albuquerque

ABQ

Med

Albuquerque

Anchorage

ANC

Med

Alaska

Atlanta

ATL

Large

Atlanta

Austin

AUS

Med

Austin

Baltimore/Washington

BWI

Large

Maryland

Charlotte

CLT

Large

Charlotte

Dallas/Ft. Worth

DFW

Large

Dallas & Ft. Worth

Denver

DEN

Large

Denver

Denver Co.

Hobby Airport

HOU

Med

Houston

Honolulu

HNL

Large

Hawaii

Houston Intercontinental

IAH

Large

Houston

John Wayne

SNA

Med

Orange Co.

Kahului

OGG

Med

Hawaii

Kansas City

MCI

Med

Kansas City

Lambert Field

STL

Med

St. Louis

Las Vegas

LAS

Large

Clark Co.

3.2

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Should Governments Lease Their Airports?

20

Name

Code

Hub Size

City Owner

County Owner

State Owner

Los Angeles

LAX

Large

Los Angeles

Love Field

DAL

Med

Dallas

Miami

MIA

Large

Miami-Dade Co.

Midway

MDW

Large

Chicago

Mitchell Field

MKE

Med

Milwaukee Co.

New Orleans

MSY

Med

New Orleans

O'Hare

ORD

Large

Chicago

Palm Beach

PBI

Med

Palm Beach Co.

Philadelphia

PHL

Large

Philadelphia

Sacramento

SMF

Med

Sacramento Co.

Salt Lake City

SLC

Large

Salt Lake City

San Antonio

SAT

Med

San Antonio

San Francisco

SFO

Large

San Francisco

San Francisco Co.

San José

SJC

Med

San José

Sky Harbor

PHX

Large

Phoenix

Source: Airports Council International-North America

To estimate the possible acquisition value of each airport, financial statement data were

obtained from a database maintained by the FAA’s Certification Activity Tracking System.

8

The most-recent data reported for each airport (either 2018 or 2019) were used in the

analysis. Table 3A shows the EBITDA number derived from each airport’s financial data,

including its revenue from Passenger Facility Charges (PFCs). The EBITDA multiples used

here are based on data for 30 overseas commercial airport transactions from 2008 through

2013, assembled by Macquarie and provided to the author for the previously noted 2018

study on infrastructure asset recycling.

9

Those numbers ranged from a low of 10X to a high

of 35X. To be conservative, this analysis used 14X for the low-value estimate and 20X for

the high-value estimate.

8

FAA. (CATS) Certification Activity Tracking System. https://cats.airports.faa.gov.

9

Poole. “Asset Recycling to Rebuild America’s Infrastructure.”

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Reason Foundation

21

TABLE 3A: DATA USED TO ESTIMATE AIRPORT’S VALUE ($USD)

Airport Name

Airport ID

EBITDA

(+) PFC

EBITDA inc PFC

Outstanding Debt

Albuquerque

ABQ

$18,343,987

$10,002,444

$28,346,431

$13,795,000

Anchorage*

ANC

$71,566,866

$5,174,021

$76,740,887

$389,592,782

Atlanta

ATL

$252,317,662

$209,320,489

$461,638,151

$3,148,792,609

Austin*

AUS

$49,157,600

$30,141,757

$79,299,357

$789,221,779

Baltimore/ Washington

BWI

$62,459,807

$51,356,227

$113,816,034

$641,876,865

Charlotte

CLT

$103,692,002

$63,161,000

$166,853,002

$981,879,000

Dallas/ Ft. Worth

DFW

$452,009,556

$141,855,941

$593,865,497

$6,512,199,000

Denver*

DEN

$334,047,138

$123,907,063

$457,954,201

$6,414,792,843

Hobby Airport

HOU

$25,811,887

$25,987,660

$51,799,547

$485,599,641

Honolulu

HNL

$101,620,220

$31,770,131

$133,390,351

$2,553,500,454

Houston Intercontinental

IAH

$139.585,069

$85,166,841

$224,751,910

$1,692,806,144

John Wayne

SNA

$40,823,290

$20,676,598

$61,499,888

$98,078,955

Kahului

OGG

$36,931,305

$9,827,794

$46,759,099

n/a

Kansas City

MCI

$41,567,033

$22,733,307

$64,300,340

$319,676,338

Lambert Field

STL

$56,415,271

$29,539,295

$85,954,566

$758,895,535

Las Vegas*

LAS

$267,580,542

$94,596,711

$362,177,253

$3,882,145,000

Los Angeles

LAX

$719,356,964

$173,100,256

$892,457,220

$7,239,791,000

Love Field

DAL

$67,879,080

$29,406,898

$97,285,978

$710,654,000

Miami*

MIA

$347,161,456

$82,242,134

$429,403,590

$5,943,190,000

Midway*

MDW

$25,121,647

$39,469,294

$64,590,941

$1,819,048,275

Mitchell Field*

MKE

$19,042,636

$14,717,876

$33,760,512

$161,055,000

New Orleans*

MSY

$22,915,743

$26,409,514

$49,325,257

$1,283,319,454

O'Hare*

ORD

$351,646,856

$163,221,017

$514,867,873

$10,930,487,352

Palm Beach*

PBI

$23,792,374

$13,268,476

$37,060,850

$76,940,482

Philadelphia

PHL

$124,965,289

$64,031,965

$188,997,254

$1,676,652,000

Sacramento

SMF

$82,004,887

$25,587,275

$107,592,162

$969,021,002

Salt Lake City

SLC

$75,028,339

$49,720,539

$124,748,878

$2,047,343,494

San Antonio*

SAT

$47,858,206

$19,031,976

$66,890,182

$470,225,000

San Francisco

SFO

$485,221,232

$110,898,881

$596,120,113

$7,304,400,000

San José

SJC

$93,925,876

$29,735,049

$123,660,925

$1,210,946,000

Sky Harbor

PHX

$141,731,183

$86,090,890

$227,822,073

$1,668,770,000

The asterisk (*) indicates that 2018 financial data were the most recent figures in the FAA database for those airports.

Source: FAA airport financial data and author calculations

Multiplying the EBITDA number by the relevant multiple yields a low and a high estimate

of each airport’s gross value. Los Angeles International (LAX), for example, has an estimated

gross value ranging from a low of $12.5 billion (at 14X) to a high of $17.8 billion (at 20X).

For much-smaller John Wayne Airport (SNA), the gross value estimates range from $861

million to $1.2 billion.

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Should Governments Lease Their Airports?

22

However, the gross value is not the end of the story. Under federal tax law, facilities financed

via federally tax-exempt bonds cannot be transferred to P3 investors unless those bonds are

paid off or refinanced. Table 3A also lists the outstanding debt of each airport. Because the

airport owner must pay off the existing debt, that amount is subtracted from the estimated

gross value to get the estimated net value of proceeds to the city, county, or state government

that owns the airport. For most of the airports in Table 3B, that is still a sizable number.

TABLE 3B: ESTIMATED AIRPORTS’ GROSS AND NET VALUES ($USD)

Airport Name

Low Mult

High Mult

Low Value

High Value

Low Net

High Net

Albuquerque

14

20

$396,850,034

$566,928,620

$383,055,034

$553,133,620

Anchorage*

14

20

$1,074,372,418

$1,534,817,740

$684,779,636

$1,145,224,958

Atlanta

14

20

$6,462,934,114

$9,232,763,020

$3,314,141,505

$6,083,970,411

Austin*

14

20

$1,110,190,998

$1,585,987,140

$320,969,219

$796,765,361

Baltimore/ Washington

14

20

$1,593,424,476

$2,276,320,680

$951,547,611

$1,634,443,815

Charlotte

14

20

$2,335,942,028

$3,337,060,040

$1,354,063,028

$2,355,181,040

Dallas/ Ft. Worth

14

20

$8,314,116,958

$11,877,309,940

$1,801,917,958

$5,365,110,940

Denver*

14

20

$6,411,358,814

$9,159,084,020

$(3,434,029)

$2,744,291,177

Hobby Airport

14

20

$725,193,658

$1,035,990,940

$239,594,017

$550,391,299

Honolulu

14

20

$1,867,464,914

$2,667,807,020

$(686,035,540)

$114,306,566

Houston Intercontinental

14

20

$3,146,526,740

$4,495,038,200

$1,453,720,596

$2,802,232,056

John Wayne

14

20

$860,998,432

$1,229,997,760

$762,919,477

$1,131,918,805

Kahului

14

20

$654,627,386

$935,181,980

$654,627,386

$935,181,980

Kansas City

14

20

$900,204,760

$1,286,006,800

$580,528,422

$966,330,462

Lambert Field

14

20

$1,203,363,924

$1,719,091,320

$444,468,389

$960,195,785

Las Vegas*

14

20

$5,070,481,542

$7,243,545,060

$1,188,336,542

$3,361,400,060

Los Angeles

14

20

$12,494,401,080

$17,849,144,400

$5,254,610,080

$10,609,353,400

Love Field

14

20

$1,362,003,692

$1,945,719,560

$651,349,692

$1,235,065,560

Miami*

14

20

$6,011,650,260

$8,588,071,800

$68,460,260

$2,644,881,800

Midway*

14

20

$904,273,174

$1,291,818,820

$(914,775,101)

$(527,229,455)

Mitchell Field*

14

20

$472,647,168

$675,210,240

$311,592,168

$514,155,240

New Orleans*

14

20

$690,553,598

$986,505,140

$(592,765,856)

$(296,814,314)

O'Hare*

14

20

$7,208,150,222

$10,297,357,460

$(3,722,337,130)

$(633,129,892)

Palm Beach*

14

20

$518,851,900

$741,217,000

$441,911,418

$664,276,518

Philadelphia

14

20

$2,645,961,556

$3,779,945,080

$969,309,556

$2,103,293,080

Sacramento

14

20

$1,506,290,268

$2,151,843,240

$537,269,266

$1,182,822,238

Salt Lake City

14

20

$1,746,484,292

$2,494,977,560

$(300,859,202)

$447,634,066

San Antonio*

14

20

$936,462,548

$1,337,803,640

$466,237,548

$867,578,640

San Francisco

14

20

$8,345,681,582

$11,922,402,260

$1,041,281,582

$4,618,002,260

San José

14

20

$1,731,252,950

$2,473,218,500

$520,306,950

$1,262,272,500

Sky Harbor

14

20

$3,189,509,022

$4,556,441,460

$1,520,739,022

$2,887,671,460

The asterisk (*) indicates that 2018 financial data were the most recent figures in the FAA database for those airports.

Source: FAA airport financial data and author calculations

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Reason Foundation

23

The most dramatic example is Chicago O’Hare, whose low

valuation goes from $7.2 billion pre-debt payoff to minus $3.7

billion after debt payoff.

Six of the airports in Table 3 have such a large outstanding debt (due to recent expansion

projects) that if their gross value is calculated using the low (14X) multiple, the net value is

negative. The most dramatic example is Chicago O’Hare, whose low valuation goes from

$7.2 billion pre-debt payoff to minus $3.7 billion after debt payoff. That would make this an

unattractive investment. If the gross proceeds turn out to be closer to the high (20X)

multiple, only three airports would have a negative net value: Chicago Midway (MDW), New

Orleans (MSY), and Chicago O’Hare (ORD). Those airports might still be of interest to

investors if the airport market shifts toward higher EBITDA multiples (e.g., 25X or 30X) after

the Covid-19 recession.

There are differences of opinion about airport EBITDA multiples going forward. In

November 2019, Inframation News reported that its study of airport valuations from 2010

through 2018 found “a steady increase in multiples over the eight-year timeframe,” based

on 31 European transactions involving single airports.

10

Three months later, Infrastructure

Investor raised a caution flag based on two adverse actions in the U.K.—a local government

(North Somerset) blocking a planned expansion of investor-owned Bristol Airport and a

ruling by the Court of Appeal against the previously authorized third runway project at

London Heathrow.

11

Both actions stemmed from concerns over climate change and the

2016 Paris Agreement. Another warning flag was raised by Inspiratia, another infrastructure

analysis service. While reporting very recent airport transactions early in 2020, it cited the

coronavirus and Brexit as potentially reducing airline and airport passenger volume in

2020—and hence, near-term airport value.

12

10

Martinez, Pablo and Jenisa Patel. “The Story in Numbers: European Airport Valuations High and Rising.”

Inframation News. Nov. 19, 2019.

11

Week in Review. “Should Airport Valuations Prepare for a Hard Landing?” Infrastructure Investor. Feb. 27,

2020.

12

Coker, Omolola. “Covid-19, ESG, and Brexit Effect All Threatening 2020 Airport Activity.” Inspiratia. March

5, 2020.

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Should Governments Lease Their Airports?

24

To the extent that investors are more cautious about airports in

2021 and beyond, valuations may end up being closer to our low

estimates (based on 14X) than on our high estimates (based on

20X).

To the extent that investors are more cautious about airports in 2021 and beyond,

valuations may end up being closer to our low estimates (based on 14X) than on our high

estimates (based on 20X). Fitch Ratings estimates a two-year recovery period for air traffic,

and points out that the airports it rates “are generally in strong financial positions, with an

average of 500 days’ cash on hand and a debt service coverage ratio of 1.8.

13

On the

positive side, since only one U.S. airport is currently operating under a long-term P3 lease

(San Juan), there are indications of a pent-up investor demand for U.S. airports that could

lead to multiples at or above the high end of the valuation estimates. For example, when

the city of St. Louis issued its request for qualifications for a potential P3 lease of its

Lambert Field airport in 2019, there was great surprise that 18 teams submitted

qualifications.

14

THE 31 AIRPORTS, IN BRIEF

• Albuquerque (ABQ) is a medium hub serving New Mexico’s largest city, which owns

the airport. ABQ has extensive service by Southwest; other carriers include

American, Delta, and United. With modest debt of $13.8 million, its gross and net

valuations are not dramatically different, with the high net valuation at $553

million.

• Anchorage (ANC) is also a medium hub, owned by the state of Alaska and located in

Alaska’s largest city. Its dominant carrier is Alaska Airlines, and it is also served by a

number of local airlines, plus a small amount of service from Delta and United. ANC

13

Broderick, Sean. “Fitch Ratings Eyes Two-Year U.S. Traffic Recovery Period.” Aviation Daily, March 25,

2020.

14

Siemers, Erik. “City Attracts 18 Firms Interested in Privately Operating Lambert Airport.” St. Louis Business

Journal. Nov. 4, 2019.

3.3

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Reason Foundation

25

has also served as a refueling stop for some flights between the United States and

Asia. Its relatively high debt ($390 million) reduces its high value estimate from a

gross of $1.5 billion to a net $1.1 billion.

• Atlanta (ATL) is a large hub owned by the city of Atlanta. It serves as the largest hub

for Delta Air Lines, which handles 73% of ATL passengers (not including those

handled by its regional airline partners). Despite over $3 billion in debt, ATL’s high

net valuation estimate is $6.1 billion. Delta is assumed to be opposed to any change

from city ownership, but a P3 lease by the city might be seen as a less-bad

alternative to legislation that would transfer ownership to a state airport authority,

as has been proposed by legislators in 2019 and again in 2020.

• Austin (AUS) is a fast-growing medium hub owned by the city of Austin. It is well-

served by American, Delta, Southwest, and United. Its projected growth makes

another terminal a likely need, and its already high debt of $789 million reduces its

high valuation from $1.59 billion to $797 million. AUS made use of a P3 agreement

to finance the refurbishment and operation of a former terminal that is now used by

low-cost carriers.

• Baltimore-Washington International (BWI) is a large hub owned by the state of

Maryland. It is a major focus city for Southwest, which handles 57% of BWI’s

passengers. It also has service from American, Delta, and United. With $642 million

in debt, its high valuation is reduced from a gross $2.28 billion to a net $1.63 billion.

• Charlotte (CLT) is a large hub owned by the city of Charlotte. It is the site of a major

hub for American (91% of all passengers) with other service by Delta, JetBlue,

Southwest, and United. With nearly $982 million in debt, its high gross valuation of

$3.3 billion is reduced to a net value of $2.4 billion.

• Dallas/Ft. Worth International (DFW) is a large hub owned jointly by the cities of

Dallas and Ft. Worth. It is the largest hub for American airlines, which accounts for

84% of its passengers (including regional affiliates Envoy Air and Mesa). Spirit

accounts for 4.37% and Delta for 3.95%, with an array of other carriers accounting

for the remaining 7.6%. With its outstanding debt of $6.5 billion, its high net

valuation is $5.36 billion and its low net value is $1.8 billion. Since the city of Dallas

owns 64% of DFW, it would be entitled to 64% of the net proceeds.

• Denver (DEN) is owned by the city and county of Denver. It has a large presence of

Frontier, Southwest, and United, and is also served by American and Delta. Its

growth in recent years has led to large-scale terminal expansion projects. Its $6.4

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Should Governments Lease Their Airports?

26

billion debt makes it one of six airports in the table whose low net valuation is

negative, but its high gross valuation is reduced from $9.2 billion to a net of $2.7

billion. DEN terminated a major terminal P3 project in 2019 after being unable to

agree with the concession company on a number of construction issues.

• Hobby Airport (HOU) is a medium hub owned by the city of Houston and is a major

focus city for Southwest, with 93% of all HOU passengers. There is minor service

from Delta, JetBlue, and a few others. Its outstanding debt of $486 million reduces

its high valuation from $1.04 billion to a net $550 million.

• Honolulu (HNL) is owned by the state of Hawaii as part of a group of 15 airports,

most of them small. The state issues and reports its debt on a consolidated basis, so

the debt listed in Table 3 is for the entire airport system. Though most of its airports

are very small, several, including Kahului (OGG), have considerable scheduled

service. The reported debt of $2.55 billion leads to a negative net valuation using

the low EBITDA multiple and reduces the high value from $2.67 billion gross to just

$114 million net. Several legislative attempts, supported by its major carriers, to

replace state ownership with an airports authority have failed.

• Houston Intercontinental (IAH) is a large hub also owned by the city of Houston, as

part of its Houston Airport System. It is a major hub for United (53% of passengers),

and has additional service from American, Spirit, and regional carriers. Its affiliate,

HAS Development Corporation, has been involved with multiple airport

privatizations and P3 projects, primarily in Central and South America. IAH’s debt of

$1.69 billion reduces its high gross valuation from $4.5 billion to $2.8 billion net.

• John Wayne Airport (SNA) is a medium hub owned by the Orange County, California

government. Southwest accounts for 35% of passengers, with additional service by

American, United, Alaska, and Delta. It has little room for further expansion due to

land and noise constraints. SNA’s debt is $98 million. With a high gross value of

$1.23 billion, its net valuation is $1.13 billion.

• Kahului Airport (OGG) is a medium hub owned by the state of Hawaii and located on

Maui. It is served by Alaska, American, Delta, Southwest, and United from the

mainland as well as inter-island carriers. As noted under Honolulu (HNL), no debt is

listed for OGG, so the calculations in Table 3 may be misleading. They show a gross

and net high valuation of $935 million.

• Kansas City (MCI) is a medium hub, owned by the city of Kansas City, Missouri. Its

largest carrier is Southwest (49%), with additional service by American, Delta, and

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Reason Foundation

27

United. Conservatively managed, it has outstanding debt of $320 million. With a

high gross valuation of $1.29 billion, its net value would be $966 million.

• Lambert Field (STL) is a medium hub owned by the city of St. Louis. Southwest is its

largest carrier, with 62% of total passenger volume, followed by American, Delta,

and Frontier. The city government in December 2019 abruptly terminated a P3 lease

procurement

15

shortly after receiving responses to its RFQ from 18 teams of

companies. The airport debt totals $759 million; its high gross valuation is $1.7

billion, which reduces to $960 million after debt retirement.

• Las Vegas (LAS) is a large hub owned by Clark County, Nevada. Its largest carrier is

Southwest, but it is also served by Allegiant, American, Delta, Spirit, and United. Its

outstanding debt of $3.88 billion reduces its high gross valuation estimate from

$7.24 billion to $3.36 billion net.

• Los Angeles International (LAX) is a large hub owned by the city of Los Angeles,

with service from all the major U.S. carriers and numerous overseas airlines. It is

continuing a large terminals expansion effort to accommodate growing passenger

numbers, with its total debt now at $7.24 billion. But its high gross valuation at

$17.85 billion yields a still very large $10.6 billion net value, the highest in the

table. In the 1990s, LAX was proposed by then-Mayor Richard Riordan as a

candidate for privatization.

• Love Field (DAL), owned by the city of Dallas, is the home base of Southwest, which

provides nearly all the airline service there. Its debt of $675 million reduces its high

valuation from $2 billion to $1.235 billion net.

• Miami International (MIA) is a large hub owned by Miami-Dade County. It hosts one

of American’s largest hubs, accounting for 68% of MIA’s passengers. Delta and

United are also significant carriers, and the airport has extensive international

service to Europe and Latin America. Thanks to large-scale terminal expansions

which are still being paid for, MIA’s debt totals $5.94 billion. Its high gross valuation

is $8.59 billion, which yields a net valuation of $2.65 billion.

• Midway (MDW) is a large hub owned by the city of Chicago. It is dominated by

Southwest, with 95% of the passenger traffic. Midway’s debt is $1.82 billion. That

reduces its high gross value of $1.29 billion to a net negative $527 million, making it

15

Schlinkmann, Mark. “St. Louis Airport Privatization Is Dead, Krewson Says.” St. Louis Post-Dispatch. Dec. 23,

2019.

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Should Governments Lease Their Airports?

28

an unattractive candidate for a P3 lease, unless EBITDA multiples significantly

exceed 20X in future years. The city made two previous efforts to lease MDW,

neither of which succeeded.

• Mitchell Field (MKE) is a medium hub owned by Milwaukee County, Wisconsin. Its

largest carrier is Southwest (43%), with significant service also by American, Delta,

and Frontier. Its debt is a modest $161 million; hence, its high gross valuation of

$675 million yields a still-high net value of $514 million.

• New Orleans (MSY) is a medium hub owned by the city of New Orleans. It has a

well-balanced set of carriers with Southwest as largest (36%), followed by Delta,

American, United, and Spirit. Having just replaced its old terminal with a new, larger

one, its debt is $1.28 billion. With a high gross valuation of $986 million, its net

value is negative.

• O’Hare (ORD) is a large hub also owned by the city of Chicago. It hosts airline hubs

for both American and United, and is served by many overseas airlines. The airport is

continuing massive modernization efforts, which included realigning and adding

runways, plus major terminal expansions that are under way. As a result, its debt is

now $10.9 million, which exceeds its high gross value of $10.3 billion, making it an

unlikely P3 lease candidate, unless EBITDA multiples exceed 20X in future years.

• Palm Beach International (PBI) is a medium hub owned by Palm Beach County,

Florida. Its largest carrier is JetBlue (28%) with significant additional service by

Delta, American, Southwest, and United. Conservatively managed, its debt is $76.9

million. With a high gross valuation of $741 million, its net value is $664 million.

• Philadelphia International (PHL) is a large hub owned by the city of Philadelphia. It

hosts a hub for American (47% of passengers) and has other service from Southwest,

Delta, Frontier, and United. Its debt is $1.68 billion, and its high gross valuation is

$3.78 billion, yielding a net value of $2.1 billion.

• Sacramento (SMF) is a fast-growing medium hub owned by Sacramento County,

California. Southwest is its largest carrier, with 55% of passenger traffic, followed by

American, United, and Delta. Its current debt is $969 million, which reduces the high

gross valuation of $2.15 billion to a net valuation of $1.18 billion.

• Salt Lake City (SLC) is a large hub owned by Salt Lake City. Delta operates a hub at

SLC and handles 52% of all passengers, followed by Delta partner SkyWest,

Southwest, American, and JetBlue. With a major terminal replacement under way, its

outstanding debt is $2.05 billion. Its low gross valuation is $1.75 billion, which is

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Reason Foundation

29

less than its debt. With the high gross valuation of $2.5 billion, the net valuation

would be $448 million.

• San Antonio (SAT) is a medium hub owned by the city of San Antonio. Southwest is

its largest carrier, with 40% of all passengers, followed by American, United, Delta,

and Frontier. Its debt is $470 million, and its high gross valuation is $1.34 billion,

making its net valuation $868 million.

• San Francisco International (SFO) is a large hub owned by the city and county of San

Francisco. United operates a hub there and handles 41% of all passengers, followed

by Alaska, Delta, Skywest, and American. Due to recent terminal expansion projects,

its debt totals $7.3 billion. However, its high gross valuation is $11.9 billion, for a

net valuation of $4.6 billion.

• San José (SJC) is a fast-growing medium hub owned by the city of San José,

California, serving the Silicon Valley region. Its largest carrier is Southwest, handling

51% of its passengers, followed by Alaska, American, Delta, and Skywest. Its debt

totals $1.2 billion. With a high gross valuation of $2.47 billion, its net valuation is

$1.26 billion.

• Sky Harbor (PHX) is a large hub owned by the city of Phoenix. Its two largest carriers

are American and Southwest, each with 36%–37% of passenger traffic. Mesa, Delta,

and United provide additional service. The city recently terminated two proposed

facility P3 projects, one for a hotel and the other for a parking structure. After a

number of expansion projects, its debt is $1.67 billion. That reduces its high gross

valuation of $4.56 billion to $2.89 billion net.

Six of the airports in Tables 2 and 3 have “grandfathered” status, as explained previously.

They are BWI, DEN, HNL, MDW, STL, and SFO. Some might ask why any of these airport

owners would consider applying to the Airport Investment Partnership Program in order to

derive net financial benefits from their airport when they already can divert airport revenue

to their general fund budgets. The answer to this question is that the amount of annual

revenue diversion allowed to these airport owners is limited by an FAA formula.

The RAND Corporation study cited previously (footnote 1) provides a listing of

grandfathered payments for fiscal years 1995 to 2015. Table 4 provides the annual average

payment for each airport owner.

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Should Governments Lease Their Airports?

30

TABLE 4: AIRPORTS GRANDFATHERED TO DIVERT SOME REVENUE

Airport Owner

Airport(s)

Annual Average Revenue Diverted

State of Maryland

BWI

$155 million

City of Chicago

MDW, ORD

$ 26.5 million

City & County of San Francisco

SFO

$ 26 million

State of Hawaii

HNL, OGG

$ 10 million

City & County of Denver

DEN

$ 7 million

City of St. Louis

STL

$ 5.6 million

Source: Miller, Benjamin M., et al. “U.S. Airport Infrastructure Funding and Financing.” RAND Corporation, 2020.

Except for BWI, those numbers are miniscule compared with the likely net asset value of

the airports, per Table 3.

NEGOTIATING A P3 LEASE WITH AIRLINES

Airports are valuable assets, and the major airlines that use them understand this, thanks to

operating at numerous investor-controlled airports in Europe and elsewhere. When a major

change in the governance of a U.S. airport is on offer, the airlines that operate there are

important stakeholders. The airport owner will need to take their interests into account in

planning the transition.

As noted elsewhere in this report, airlines in the United States play a stronger role in

airport governance than airlines in Europe and other countries, where airlines are simply

tenants in what are increasingly corporatized or privatized commercial airport businesses.

There is a long history of U.S. airports signing long-term use and lease agreements with

anchor-tenant airlines that gave airlines the power to approve or reject capital

improvement projects via majority-in-interest (MII) clauses. Under that provision, the

“signatory” airlines (those with long-term agreements) got the right to approve or deny

projects such as terminal and gate expansions. While the trend in the post-airline-

deregulation era has been toward shorter airline agreements, fewer exclusive-use gates,

3.4

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Reason Foundation

31

and more common-use infrastructure, U.S. airlines still expect to be treated more as

partners than as tenants.

This history explains airline lobbying that took place in 1996 when Congress enacted the

initial Airport Privatization Pilot Program (APPP) that permitted five airports to be long-

term leased to for-profit companies. Airlines lobbied for and obtained a provision requiring

a double super-majority of airlines to approve an airport lease under this program;

specifically, the deal must be approved by 65% of the airlines serving the airport and by

airlines accounting for 65% of the annual landed weight at the airport.

The APPP was later expanded to 10 airports, before being replaced in 2018 by the current

Airport Investment Partnership Program (AIPP), which allows any air-carrier airport to be

leased under a long-term P3 agreement. The double-majority airline approval requirement

remains as part of AIPP.

In practice, this means that negotiation with the airlines is a priority for the airport owner

as part of the process of preparing for a P3 lease. Essentially the same process has been

carried out for the two attempts to lease Chicago’s Midway Airport, the successful P3 lease

of the San Juan Airport, and the recently-terminated effort to lease Lambert St. Louis

Airport.

Airport owners need to understand the amount of leverage Congress has given airlines,

thanks to the double 65% airline approval requirement in the AIPP legislation. Despite the

benefits to airlines from fixed airport fees and charges (with downside risks transferred to

equity investors), airlines have the right to use their veto power to enhance their benefits

from a P3 lease. Airport owners should go into the negotiation process aware that airlines

may hold out for additional benefits, such as a portion of the lease proceeds that would

otherwise go to the airport owner.

Prior to sending out a request for qualifications (RFQ) inviting prospective teams to

assemble and submit their experience and qualifications to finance, improve, operate, and

manage the airport, the airport owner (city, county, or state government) should convene

meetings with airline representatives to review the owner’s analyses and the possible

contours of the P3 lease agreement. As for-profit businesses with a potential veto power,

the airlines seek terms and conditions that will be economically beneficial for them.

Advisors generally recommend that a basic agreement with the airlines be achieved prior to

issuing the request for proposals (RFP), since this will affect the basic financial calculations

that potential teams will need to carry out in preparing their proposals.

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

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32

The basic terms that airlines agreed to in both of the Midway efforts and the successful San

Juan lease involved a near-term freeze on landing fees, followed by annual rate increases

limited by the consumer price index (CPI). This gave airlines quantifiable long-term savings

in exchange for their accepting a new form of governance for the airport. The St. Louis

agreement with airlines was different, because landing fees there were already projected to

decrease after 2031.

16

While this agreement still included caps on landing fee revenue, the

expected savings were small, so the city agreed that the airlines would receive $130

million in cash up-front on a lease agreement of up to $1.63 billion, which would amount

to about 20% of the net lease proceeds, leaving the city with 80%.

17

Airlines that have agreed to previous P3 deals include the following:

• American (San Juan, St. Louis)

• Delta (Midway, San Juan, St. Louis)

• Fedex (San Juan, St. Louis)

• JetBlue (San Juan)

• Southwest (Midway, San Juan, St. Louis)

• United (San Juan, St. Louis)

• UPS (San Juan, St. Louis)

In addition, for a proposed P3 lease of the Westchester County, New York airport in 2016,

as part of its unsolicited proposal Oaktree Capital gained support from American, JetBlue,

and United. Hence, we can see that all major U.S. airlines have been open to long-term

airport P3 lease agreements.

It is also important to note that, despite statements to the contrary by St. Louis Mayor

Krewson, the carriers at STL had signed off on the tentative agreement discussed above. In

addition, they participated in four days of invited presentations by 11 bidding teams in

December 2019 and were reported by one observer to be “totally on board and positive

about moving forward with the lease.”

18

16

“Confidential Information Presentation.” St. Louis Lambert International Airport. December 2019

(https://fly314.com/transparency-portal, accessed March 26, 2020)

17

Note 15, Sections 2.5 and 2.6.

18

Poole, Robert W. Jr. Telephone interview with John Schmidt of Mayer Brown, legal counsel to the City of

St. Louis for the Lambert P3 lease process. March 25, 2020.

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Reason Foundation

33

WHAT KINDS OF TEAMS

WOULD BID?

OVERVIEW

Suppose a city, county, or state government wanted to change the governance of an airport

that it owns, opting for a long-term P3 lease of the kind previously discussed. After

sufficient study to assess the pros and cons, as well as defining objectives for such a

change, the first external step in the process would be to issue a request for qualifications

(RFQ). This document would provide basic information about the airport and explain the

government’s interest in pursuing a long-term P3 lease.

For a project of this kind, most of those submitting qualifications (as observed globally as

well as in the recent case of Lambert St. Louis) would form teams and document their

bona-fides. The teams would typically involve an experienced airport developer/operator

and one or more equity investors. The latter would generally be either an infrastructure

investment fund or a public-sector pension fund or both. This section explains the roles and

motivations of these potential team members. As an illustration, Table 5 lists the principal

members of the 12 teams St. Louis invited to give presentations, out of the 18 teams that

responded to its 2019 RFQ.

PART 4

4.1

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Should Governments Lease Their Airports?

34

TABLE 5: TEAMS INVITED TO GIVE ST. LOUIS AIRPORT PRESENTATIONS

Airport Company

Global Rank

Infrastructure Fund

Pension Fund

Other

AENA

2

Leeds Airport

+

AMP Capital

London Gatwick

5*

Global Infrastructure Partners**

Manchester Airports

Group

29

IFM Investors

Aeroports de Paris

1

Blackstone Infrastructure Fund

PSEERS, Missouri

ASUR

43

Partners Group

AECOM

Fraport

3

OMERS

Copenhagen Airports

53

OTPP

AviAlliance

+

PSP Investment Board

Royal Schiphol Airport

13

Vinci Airports

5

Oaktree Capital

Ullico

Vantage Airport Group

+

Corsair Vantage Infrastructure

Partners

*partially owned by Vinci Airports, #5

**invited but declined to attend

+not in top 100

AIRPORT COMPANIES

Table 1 listed the largest (by revenue) airport companies in operation today; all those were

among the world’s 100 largest airport groups, some of which are government entities (such

as Royal Schiphol Airport). Some of the commercial airport companies are truly global

while others tend to be focused on specific geographic regions or smaller airports. Here are

brief descriptions of the airport companies of the teams that gave presentations in St.

Louis, along with one that did not.

• AENA is the world’s second-largest airport operator by revenue. It was originally a

government corporation that operated all of Spain’s commercial airports, including

Madrid and Barcelona. It was privatized in 2014 (though the government still owns a

bit over 50% if its shares). Given its size, it would be able to finance an airport the

size of STL on its own.

• Leeds Airport is a well-run U.K. airport owned by its partner, Australian

infrastructure fund AMP Capital, which also owns stakes in various Australian

airports.

4.2

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Reason Foundation

35

• Manchester Airports Group owns both Manchester and London Stansted airports,

and is ranked as the world’s 29

th

-largest airport operator, by revenue. MAG’s U.S.

subsidiary carries out various airport contract management functions. MAG is 35.5%

owned by IFM Investors.

• Aeroports de Paris is the world’s largest airport operator, by revenue. It owns and

operates all three Paris airports and has invested in other airports in France and

worldwide. The current French government still owns just over 50% of ADP, but its

plan to offer those shares to the public in 2020 has been postponed due to the

Covid-19 recession.

• ASUR operates about one-third of the commercial airports in Mexico, the largest of

which is Cancún. It also holds 60% of the P3 concession for the San Juan, Puerto

Rico airport. It is the world’s 43

rd

largest airport group by revenue.

• Fraport is the world’s third-largest airport group by revenue. It evolved out of

Frankfurt airport, which was part-privatized in 2001. Fraport holds stakes in major

airports in Greece and Latin America and has led efforts to expand and modernize

many of those airports.

• Copenhagen Airports, 53

rd

-largest by revenue, owns and operates its namesake

airport and holds stakes in a number of other airports. It is part-owned by pension

fund OTPP.

• AviAlliance, formerly Hochtief Airports, has stakes in and operates the Athens,

Budapest, Düsseldorf, and Hamburg airports in Europe and now holds 40% of the

San Juan airport P3.

• Royal Schipol Group, the world’s 13

th

largest by revenue, owns and operates

Amsterdam Schipol and other Dutch airports and is mostly owned by the Dutch

government. It did not include partners, on grounds of being able to finance a

medium-hub P3 on its own.

• Vinci Airports is the world’s fifth-largest airport company, by revenue. It owns

majority interests in London Gatwick, Lisbon, Santiago (Chile), and Osaka airports,

among others. The French company also owns former U.S. airport company TBI,

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Should Governments Lease Their Airports?

36

which manages terminals at airports including Atlanta, Burbank, and Orlando

Sanford.

• Vantage Airport Group began as an affiliate of the Vancouver, B.C. airport, but is now

owned by Corsair Capital. It is a major player in the P3 replacement of the Central

Terminal at New York’s LaGuardia Airport and is also part of the team selected by

JetBlue to redevelop its terminals at New York’s Kennedy Airport.

• Ferrovial Airports is a leading investor in and developer of airports. It owns and

operates London Heathrow Airport (industrial shareholder at 25%), Europe’s busiest

hub, and Glasgow, Aberdeen, and Southampton Airports (50%) in the U.K.

Global Infrastructure Partners owns major stakes in London Gatwick and Edinburgh airports

and had stakes in London City Airport. As the world’s second-largest infrastructure fund, it

did not need partners for STL. It ended up deciding not to proceed with this project, and

therefore did not accept the invitation to present.

INFRASTRUCTURE INVESTMENT FUNDS

During the past 15 years, a new phenomenon has emerged in the financial field: funds

specializing in investing in infrastructure. Many focus primarily or exclusively on acquiring

existing government-owned infrastructure, such as airports, seaports, toll roads, water and

wastewater systems, etc. Some invest in projects to develop entirely new infrastructure,

such as new toll roads or energy facilities.

These funds seek sophisticated investors, who generally take part as limited partners. The

majority of the infrastructure funds are “closed-end,” meaning that they are set up for a

specific period, such as 10 years, though there is a growing trend toward open-end funds

more focused on long-term investments. Large infrastructure endeavors, whether to

improve and operate existing facilities or to develop and operate new ones, require

financing. The funds exist to invest equity, with the majority of most project costs being

financed via long-term revenue bonds. Equity returns are higher than the interest rate on

bonds, because the equity providers are willing to take higher risks than bond buyers, and

hope to receive a reward for taking those risks.

4.3

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Reason Foundation

37

The publication Infrastructure Investor covers this field and reported that such funds raised a

near-record $97.3 billion in 2019.

19

That publication also creates an annual index of the

largest 50 funds based on the total they have raised over the most recent five-year period.

Its 2020 report found that the current top 50 have raised $496 billion over the previous five

years.

20

The top-10 funds from that table are listed below in Table 6.

TABLE 6: WORLD’S 10 LARGEST INFRASTRUCTURE INVESTMENT FUNDS, 2019

Rank

Fund Name

Headquarters

5-Year Total ($B)

1

Macquarie Infrastructure & Real Assets

London

$60.77

2

Global Infrastructure Partners

New York

$57.42

3

Brookfield Asset Management

Toronto

$38.69

4

KKR

New York

$20.19

5

AMP Capital

Sydney

$18.25

6

EQT Partners

Stockholm

$17.85

7

IFM Investors

Melbourne

$17.70

8

Stonepeak Infrastructure Partners

New York

$14.95

9

Blackstone Infrastructure Fund

New York

$14.00

10

BlackRock

New York

$10.50

Source: Infrastructure Investor

Partners Group, another of the funds in Table 5, was ranked 24

th

of the top-50 funds, at

$5.71 billion. And Oaktree Capital Management ranked 44

th

, at $3.0 billion raised.

As should be clear from this discussion, there is no shortage of equity capital available to

invest in revenue-generating infrastructure. Funds such as these have taken part in many

airport privatizations and P3 leases in recent years, and they are motivated to add U.S.

airports to their growing portfolios of infrastructure. In short, for an airport with sound

financials and reasonable growth prospects, financing long-term P3 leases should not be a

problem.

19

PEI Staff. “2019 Is Infra’s Second-Best Fund-Raising Year.” Infrastructure Investor.com. Jan. 21, 2020.

20

“The Infrastructure Investor 50.” Infrastructure Investor. November 2019.

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Should Governments Lease Their Airports?

38

PUBLIC PENSION FUNDS

Public pension funds have traditionally invested a small portion of their investment

portfolio in investor-owned infrastructure such as railroads and utilities. But until recently,

they did not invest in airports, seaports, toll roads, or most water and wastewater systems,

because in the United States and most of the world these were all government-owned and

operated. The U.S. facilities’ large capital projects were financed 100% via tax-exempt

municipal bonds. But pension funds invest in taxable bonds and equity—i.e., they buy shares

in investor-owned freight railroads and utilities. It was not until governments in Europe

began privatizing (selling shares in) airports and other government-owned utilities that

pension funds became able to invest equity in these additional categories of infrastructure.

It was not until governments in Europe began privatizing (selling

shares in) airports and other government-owned utilities that

pension funds became able to invest equity in these additional

categories of infrastructure.

In the airport sector, as noted in Part 2, some airports in Europe have been sold to investors

and in some cases their shares trade on stock markets. More commonly worldwide,

governments engage in long-term P3 leases. The winning team (such as the teams shown

in Table 5) creates a special-purpose vehicle (SPV) to finance, construct or modernize, and

operate the airport for the duration of the lease agreement. Pension funds can invest equity

in such SPVs, just as infrastructure investment funds do.

Australian and Canadian public pension funds were among the first to see the potential of

diversifying their portfolios by investing equity in privatized and P3 infrastructure such as

airports. In both countries, a handful of pension funds have built in-house staffs with

expertise in privatized and P3 infrastructure. They create diversified infrastructure

portfolios partly by investing in individual projects. The vast majority of pension funds do

not have that kind of expertise, so they invest by placing allocations of equity with one or

more of the major infrastructure funds discussed in the previous section.

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One of the top-10 funds in Table 6 is an Australian firm that specializes in investing in

infrastructure on behalf of pension funds—IFM Investors. It has grown to become the

world’s seventh largest infrastructure investment fund. Other pension funds with deep

knowledge and expertise in infrastructure include the following:

• Australian Super (Australia)

• Queensland Investment Corporation, QIC (Australia)

• Caisse de depot et placement du Quebec, CDPQ (Canada)

• Canada Pension Plan Investment Board, CPPIB (Canada)

• Ontario Teachers Pension Plan, OTPP (Canada)

• Ontario Municipal Employees Retirement System, OMERS (Canada)

• Public Service Plan Investment Board, PSP (Canada).

OTPP, for example, is an active investor in airports. Along with OMERS, it owns a significant

stake in privatized London City Airport. It is also part-owner of the Birmingham (U.K.)

Airport, Brussels (Belgium) Airport, and the Copenhagen (Denmark) Airport.

One of the few U.S. public pension funds that is developing direct-investment expertise is

the largest: the California Public Employees’ Retirement System (CalPERS). It was one of

the first American pension funds to begin investing in privatized and P3 infrastructure, with

an investment early on in London Gatwick Airport, and others in the Port of Melbourne and

the Indiana Toll Road SPV. But even with its growing expertise, the majority of CalPERS’

infrastructure investments are being made via placing funds with large infrastructure

investment vehicles, such as GIP Strategic Alliance and J.P. Morgan Infrastructure

Investments Fund.

21

21

“Inframation Deals—California Public Employees’ Retirement System.”

https://www.inframationnews.com/investors/institutional-profiles, accessed Jan. 9, 2020.

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PENSION FUNDS AS

AIRPORT INVESTORS

In the competition for the potential lease of the Lambert St. Louis Airport, it is notable that

four pension funds (PSEERS, OMERS, OTPP, and PSP) were members of various teams, as

was IFM Investors (which invests solely on behalf of pension funds) and Ullico (which

invests on behalf of union pension funds). Thus, more than half of the 11 teams that made

presentations in St. Louis included a team member representing the interests of public

employees. This section takes a deeper look at the implications of pension funds as part of

the would-be SPV for a long-term airport P3 lease.

THE TWO-FOR-ONE ASPECT OF PENSION FUNDS AND

INFRASTRUCTURE P3S

Two trillion-dollar scale U.S. problems are crying out for fresh approaches. One is under-

investment in refurbishing and modernizing critically important infrastructure, such as

airports, highways, water and wastewater systems, etc. Airports and toll roads are generally

in better shape than other U.S. infrastructure, but there is a large need for over $100 billion

in airport investment in coming decades, and much larger sums to refurbish and/or replace

aging highways, water and sewer systems, pipelines, and other vital infrastructure.

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The other massive problem is the under-funding of U.S. public pension systems. Many state

and municipal pension systems failed to recover from the losses they experienced in the

wake of the 2008 financial crisis. Many therefore entered 2020 significantly under-funded

and at risk of further deterioration during the impending recession. Even prior to the onset

of the Covid-19 pandemic, state and local governments had $1.43 trillion in unfunded

liabilities (fiscal year 2018) in their public employee pension systems.

22

On average, these

systems had only 72.8% of the assets needed to remain on track to pay all promised

pension obligations in the future—and the economic impacts of the Covid-19 recession will

significantly worsen their situations. Moreover, the Federal Reserve has lowered interest

rates further, which will make it even more difficult for pension funds to recover.

23

Over the past decade, U.S. pension funds have been sought to

increase their overall return on investments by diversifying into

alternative investments, including infrastructure. CalPERS, a

leader of this trend, currently allocates 1.3% of its $370 billion

portfolio to infrastructure. Inframation reports that its five-year

return on infrastructure investment was 12.7%, well above its

overall rate of return.

Over the past decade, U.S. pension funds have been sought to increase their overall return

on investments by diversifying into alternative investments, including infrastructure.

CalPERS, a leader of this trend, currently allocates 1.3% of its $370 billion portfolio to

infrastructure. Inframation reports that its five-year return on infrastructure investment was

12.7%, well above its overall rate of return.

24

But U.S. pension funds face a dearth of

privatized or P3 infrastructure to invest in within the United States. With few or no airports

or toll roads on the market here, they must invest overseas in order to add these kinds of

assets to their portfolios.

22

Aubry, Jean-Pierre and Caroline V. Crawford. “Update on the Funded Status of State and Local Pension

Plans—FY 2018.” Center for Retirement Research. October 2018.

23

“U.S. Pensions Take Big Coronavirus Hit.” Pension Pulse. April 3, 2020.

24

“Inframation Deals—California Employees’ Retirement System.”

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Therefore, a policy of increasing investment by U.S. pension funds in U.S. infrastructure

would require a greater use of P3 leases than is the case today. Were Congress, a state

government, or a city or county government to embrace this approach, it would stimulate

new investment to refurbish or expand existing infrastructure while helping secure the

retirements of public employees. Beyond providing financial benefits for the government

owner of the leased asset, addressing two major problems via a single policy change would

be a broader justification for P3 leases of existing facilities such as airports.

PENSION FUNDS AND THE POLITICS OF AIRPORT P3

LEASES

The P3 lease of a large or medium hub airport in the United States will likely be

controversial, at least until the practice becomes as familiar as it now is in much of Asia,

Australia, Europe, and Latin America. It would be a significant departure from the status

quo that has prevailed for more than 75 years. That status quo is familiar to the legislative

and executive branches of city, state, and county governments, and it is also familiar to U.S.

airlines (although those that fly internationally have gotten used to operating at the more

than 100 large and medium airports with substantial private investment and management).

Significant departures from the status quo are difficult, unless a

large problem with the status quo is understood and appreciated.

Significant departures from the status quo are difficult, unless a large problem with the

status quo is understood and appreciated. That was the case in San Juan, where the

government was in dire financial straits and the airport was poorly managed from the

standpoint of both airlines and passengers. Most other U.S. airports are not nearly as poorly

managed as San Juan was. Still, many airports are subjected to political micromanagement

by legislative bodies, which get involved in many details that should be the province of

airport management. And as noted earlier, many airports that are operated as departments

of a city, county, or state government have relatively short-term political appointees as

managers, rather than career airport professionals. And with Congress’ repeated failures to

give airports increased local self-help tools (such as allowing them to charge higher PFCs

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to fund debt service on new bonds for the next round of terminal expansion), the need for

additional ways to finance major projects is becoming evident.

But will those factual arguments prevail over emotional arguments defending the status

quo? These include:

• “We don’t want foreign companies managing our airport.”

• “No one should make a profit from providing a vital public service like airports.”

• “Wall Street (or London) financiers—the 1%—will make airports and air travel

unaffordable for ordinary people.”

• “Airlines should not have to pay for super-profits of airport companies.”

There are sensible answers to these kinds of statements, but in political decisions,

emotionally laden claims can be very powerful.

But consider the difference if increasing the viability of public employee pension funds is

inherent in the P3 lease of an airport. A decade ago, American public employee unions

objected vociferously to their pension funds investing in privatized and P3 infrastructure.

But CalPERS is no longer being criticized for the 12.7% return on its infrastructure portfolio,

helping to increase the fund’s overall rate of return from its current 6.7% return on

investment.

25

Public pension funds deliberately joining airport P3 lease competing teams—

and being vocal about why they are doing so—could have an important impact on public

opinion.

ADDRESSING THE JURISDICTION’S OWN PENSION SYSTEM

SHORTFALLS

All the governments that own and operate the 30 large and medium hub airports analyzed

in this report have partially unfunded public employee pension systems. Table 7 provides a

summary of the situation. For each jurisdiction, the table lists both the total unfunded

liability (in dollars) and the percentage shortfall in needed assets.

25

Wiley, Hannah. “CalPERS Narrowly Misses Its Annual Investment Target.” The Sacramento Bee. July 11,

2019.

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TABLE 7: AIRPORT NET VALUE VS. JURISDICTION UNFUNDED PENSION LIABILITY

Airport Name

Jurisdiction

Type

2019 Unfunded

Pension Liability

(from Muni CAFR)

High Net

Airport

2019

% of

Unfunded

Airport Name

Anchorage

Alaska

State

4,223,324,000

$1,145,224,958

27%

Anchorage

Albuquerque

Albuquerque

City

681,086,868

$553,133,620

81%

Albuquerque

Atlanta Hartsfield-

Jackson

Atlanta

City

1,100,188,000

$6,083,970,411

553%

Atlanta Hartsfield-

Jackson

Austin Bergstrom

Austin

City

2,898,672,000

$796,765,361

27%

Austin Bergstrom

Charlotte

Charlotte

City

438,706,000

$2,355,181,040

537%

Charlotte

Chicago Midway

Chicago

City

31,787,657,000

($527,229,455)

-2%

Chicago Midway

Chicago O'Hare

Chicago

City

31,787,657,000

($633,129,892)

-2%

Chicago O'Hare

Las Vegas

Clark Co.

County

2,933,245,295

$3,361,400,060

115%

Las Vegas

Love Field

Dallas

City

4,738,920,000

$1,235,065,560

26%

Love Field

Dallas/ Ft.Worth

Dallas (64%)

City

4,738,920,000

$3,433,670,400

72%

Dallas/ Ft.Worth

Denver

Denver Co.

City/County

1,513,903,000

$2,744,291,177

181%

Denver

Dallas/ Ft.Worth

Ft. Worth (36%)

City

3,098,278,000

$1,931,439,600

62%

Dallas/ Ft.Worth

Honolulu

Hawaii

State

6,837,450,000

$114,306,566

2%

Honolulu

Kahului

Hawaii

State

6,837,450,000

$935,181,980

14%

Kahului

Houston Hobby

Houston

City

4,072,151,000

$550,391,299

14%

Houston Hobby

Houston

Intercontinental

Houston

City

4,072,151,000

$2,802,232,056

69%

Houston

Intercontinental

Kansas City

Kansas City

City

783,661,000

$966,330,462

123%

Kansas City

Los Angeles

Los Angeles

City

7,874,521,000

$10,609,353,40

0

135%

Los Angeles

Baltimore/

Washington

Maryland

State

19,137,354,000

$1,634,443,815

9%

Baltimore/

Washington

Miami

Miami-Dade Co.

County

4,432,677,000

$2,644,881,800

60%

Miami

Mitchell Field

Milwaukee Co.

County

755,515,000

$514,155,240

68%

Mitchell Field

New Orleans*

New Orleans

City

951,130,000

($296,814,314)

-31%

New Orleans*

John Wayne

Orange Co.

County

4,921,057,000

$1,131,918,805

23%

John Wayne

Palm Beach

Palm Beach Co.

County

1,496,526,203

$664,276,518

44%

Palm Beach

Philadelphia

Philadelphia

City

5,955,375,000

$2,103,293,080

35%

Philadelphia

Sky Harbor

Phoenix

City

4,777,073,000

$2,887,671,460

60%

Sky Harbor

Sacramento

Sacramento Co.

County

1,733,444,000

$1,182,822,238

68%

Sacramento

Salt Lake City

Salt Lake City

City

194,258,686

$447,634,066

230%

Salt Lake City

San Antonio

San Antonio

City

1,323,043,000

$867,578,640

66%

San Antonio

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Airport Name

Jurisdiction

Type

2019 Unfunded

Pension Liability

(from Muni CAFR)

High Net

Airport

2019

% of

Unfunded

Airport Name

San Francisco

San Francisco

City/County

4,429,115,000

$4,618,002,260

104%

San Francisco

San José

San José

City

3,129,095,000

$1,262,272,500

40%

San José

Lambert Field

St. Louis

City

397,666,000

$960,195,785

241%

Lambert Field

Source: Author’s calculations based on data provided by Reason Foundation Pension Integrity Project

Note *At the time of this writing, New Orleans was the only jurisdiction without an audited FY2019 pension liability

figure; hence, FY2018 data are used in this one case.

One possible use of proceeds from the P3 lease of an airport (or any other revenue-

producing infrastructure facility) is to pay down the unfunded liability of the pension

system. Sooner or later, the system must pay all promised benefits. The available

alternatives are (1) politically difficult reforms to adjust the rules under which the system

operates, (2) increasing taxes on the jurisdiction’s citizens, (3) crowding out other areas of

public spending in order to increase the amount devoted to pension systems, or (4)

devoting any unexpected windfalls to increasing the pension system’s assets. If some or all

of the airport’s net asset value is paid up-front in a lump sum, that could be considered an

unexpected windfall.

There are several different ways in which P3 lease proceeds can be disbursed. Some further

discussion of the alternatives is provided in Part 6.

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WISE USE OF P3 LEASE

PROCEEDS

OVERVIEW

There are several ways in which the SPV that wins the bidding and negotiates the long-

term lease of an airport could make the lease payments. Worldwide, for revenue-producing

assets such as airports and toll roads, the most common approach is for the SPV to pay the

entire amount up-front. But there is also a trend in which the winner pays a portion of the

total up-front and then pays a fixed or variable amount each year of the lease term. In the

airport sector, the latter type of structure may configure the annual payments as some

fraction of gross or net airport revenue.

A key concept is that a one-time windfall should not be used to

avert a short-term operating budget problem. It is a contribution of

capital and should be used to improve the government’s balance

sheet, rather than its income statement.

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Since nearly all such P3 lease agreements include a large up-front payment of some sort,

this section discusses how the government in question should deal with such a windfall. A

key concept is that a one-time windfall should not be used to avert a short-term operating

budget problem. It is a contribution of capital and should be used to improve the

government’s balance sheet, rather than its income statement. There are three principal

ways to do this, discussed in the paragraphs below.

INVESTING IN OTHER NEEDED INFRASTRUCTURE

In other countries, including Australia and India, a policy known as “infrastructure asset

recycling” is explicit government policy. The best-known approach was a federal program

in Australia several years ago. The federal government sought to encourage state

governments to sell or lease revenue-producing facilities (such as seaports and state-

owned utilities) and use the proceeds to invest in other needed infrastructure that was

currently unbudgeted. In 2014, Australia’s federal government created a formal asset

recycling policy to encourage state governments by offering them grants equal to 15% of

the value of the net proceeds from the sale or P3 lease of state assets. Importantly, the

policy stipulated that the proceeds were to be invested in new infrastructure only. Over a

several-year period, this program led to A$20 billion in new infrastructure investment,

primarily in New South Wales and in the Australian Capital Territory.

26

In the United States, the long-term P3 lease of the Indiana Toll

Road (ITR) in 2006 is a good example of asset recycling. The

winning bidder paid $3.8 billion, all of it up-front.

More recently, the National Highways Authority of India has been auctioning long-term P3

leases of toll roads under its Toll-Operate-Transfer (TOT) program, with the proceeds used

to invest in upgrading lower-level roads.

27

Pension funds CDPQ and CPPIB have been

among the bidders.

26

Poole, Robert W., Jr. “Asset Recycling to Rebuild America’s Infrastructure.” Reason Foundation. October

2018. Part 3.

27

Srivastava, Vikas. “NAHI Plans Fifth TOT Auction in Feb to Raise Rs 3,000 Crore.” Financial Express. Jan. 22, 2020.

6.2

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In the United States, the long-term P3 lease of the Indiana Toll Road (ITR) in 2006 is a

good example of asset recycling. The winning bidder paid $3.8 billion, all of it up-front.

After paying off the $200 million in ITR debt, the state created a 10-year, $2.6 billion

statewide highway improvement program called Major Moves. It also put $500 million into

a Next Generation Trust Fund to provide long-term maintenance for the new highway

infrastructure created by Major Moves.

28

In this case, it turned out to be fortunate that the

state of Indiana received 100% of the lease payments up-front, because the original SPV

was so highly leveraged that it was unable to make scheduled debt service payments

during the Great Recession, and ended up filing for Chapter 11 bankruptcy in 2014. A

consortium of pension funds, organized by IFM Investors, then paid $5.7 billion for the

remaining years of the 75-year lease, which paid off the former SPV’s creditors.

29

In the San Juan airport P3 lease discussed in Part 2, of the $1.2 billion total lease payment,

the Aerostar SPV paid $615 million up-front and agreed to pay the balance over the 40-

year term of the lease. It also agreed to make large-scale capital investments in the airport,

which freed up funds for the Ports Authority to use on its other airports.

The United States faces a large shortfall in infrastructure

investment, as chronicled every two years by the American

Society of Civil Engineers.

The United States faces a large shortfall in infrastructure investment, as chronicled every

two years by the American Society of Civil Engineers. Its series of Report Cards estimates

needed refurbishment and modernization of existing infrastructure and addition of new

infrastructure in the categories of transportation (airport, highways, transit, etc.), energy

and environmental facilities, and other public facilities.

30

ASCE’s latest estimate of 10-year

investment needs is $2.6 trillion. A city, county, or state policy of infrastructure asset

recycling would first define assets that could be sold (such as real estate) and revenue-

producing infrastructure that could be P3 leased to competent companies, financed by

28

Poole, “Asset Recycling to Rebuild America’s Infrastructure.” 22–24.

29

“IFM Investors Completes Acquisition of Indiana Toll Road Concession Company.” Businesswire.com. May

27, 2015.

30

“2021 Report Card for America’s Infrastructure,” American Society of Civil Engineers, 3 March 2021.

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infrastructure investment funds and/or pension funds. Airports could be one of the assets

identified under such a policy.

PAYING DOWN GOVERNMENT DEBT

Another way to improve a government’s balance sheet would be to

pay off portions of the jurisdiction’s bonds, avoiding future debt service

costs and improving the jurisdiction’s overall bond rating.

Another way to improve a government’s balance sheet would be to pay off portions of the

jurisdiction’s bonds, avoiding future debt service costs and improving the jurisdiction’s

overall bond rating. Such a policy would, in effect, add some reserve bonding capacity for

times in the future when that may be required.

When the city of Chicago leased the Chicago Skyway via a 99-year P3 lease in 2005, it used

most of the $1.8 billion proceeds for balance-sheet improvements.

31

They included:

• Retire its existing Skyway bonds: $463 million

• Pay down long-term city debt: $134 million

• Eliminate short-term debt obligations: $258 million

• Establish a long-term reserve: $500 million

• Establish a mid-term reserve: $375 million

• Create a neighborhood investment fund: $100 million.

In another Chicago example, the city leased four underground parking garages, owned by

the city and the Chicago Parks District. They constituted the country’s largest underground

parking system and garnered considerable interest from investors and parking companies.

The 99-year P3 lease generated $563 million for the city and the District. The city used

most of its share to pay off debt, and the District paid off debt and established three funds

for different park improvements.

32

31

“Infrastructure Case Study: Chicago Skyway Bridge.” Bipartisan Policy Center. October 2016.

32

“The Chicago Parking Garage Leases.” The Civic Federation. Dec. 15, 2010.

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REDUCING UNFUNDED PENSION SYSTEM LIABILITIES

Unfunded public employee pension obligations are a very large component of the liabilities

on many city, county, and state balance sheets. So, as mentioned briefly in Part 5, another

prudent use of P3 lease proceeds would be to reduce unfunded liabilities by transferring

some or all of the airport lease proceeds to the jurisdiction’s pension system.

…another prudent use of P3 lease proceeds would be to reduce

unfunded liabilities by transferring some or all of the airport lease

proceeds to the jurisdiction’s pension system.

The extent to which the estimated high valuation of each airport could reduce the

jurisdiction’s unfunded pension liability varies enormously, as Table 7 revealed. The largest

ratio of lease proceeds to pension fund liabilities is that of Atlanta, where the $6 billion net

proceeds greatly exceed the city’s $1.1 billion unfunded liability. Other jurisdictions where

the high net value exceeds the unfunded liability are:

• Atlanta 553% of the unfunded liabilities

• Charlotte 537%

• St. Louis 241%

• Salt Lake City 230%

• Denver 181%

• Los Angeles 135%

• Kansas City 123%

• Clark Co., NV 115%

• San Francisco 104%

At the other end of the scale, since the estimated net airport value is negative in two

jurisdictions—Chicago and New Orleans—there would likely be no net lease proceeds

available for the large unfunded liabilities of their pension systems (unless the EBITDA

multiples were higher than 20X, as some have been in recent years). The three states that

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own airports in this study—Alaska, Hawaii, and Maryland—have such large unfunded pension

liabilities that lease proceeds would have only a modest impact on reducing those liabilities.

Cases in which net lease proceeds are between 60% and 98% of the unfunded pension

system liabilities may be more promising candidates for using some or all of the proceeds

toward pension fund solvency. These include:

• Dallas (both airports) 98% of the unfunded liabilities

• Houston (both airports) 83%

• Albuquerque 81%

• Milwaukee Co. 68%

• Sacramento Co. 68%

• San Antonio 66%

• Ft. Worth 62%

• Miami-Dade Co. 60%

• Phoenix 60%

Several cautions should be noted in considering this use of airport P3 lease proceeds. Pension

liabilities have accumulated over decades, due to an array of decisions made by legislative

bodies (city or county councils, state legislators) to provide retirement benefits with

insufficient concern for where the resources would come from to fully pay for the resulting

benefits to future retirees. Often, elected officials voted for these rules and provisions while

aware that by the time the pension system reached the point where promised benefits vastly

exceeded the resources needed to pay them, those elected officials would be retired or dead

and not able to be held accountable. A one-time infusion of a windfall from lease proceeds

would improve the near-term solvency of the pension system, but if rules and provisions

remained in place that create more promised benefits than projected revenues could cover,

the problem would have been postponed rather than being solved.

The city, county, or state government responsible for each of the airports discussed in this

report will have to weigh the alternative uses of the lease revenues from any transaction

such as the P3 lease of an airport. Whether investing those proceeds in needed

infrastructure, in debt reduction, or in pension fund solvency is the best use will be a

decision specific to each governmental entity.

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Pension System Unfunded Liability Calculations

The analysis of the unfunded pension system liabilities of the jurisdictions that own the

31 airports in this study was carried out by the Pension Integrity Team of Reason

Foundation (https://reason.org/pension-integrity-project).

For purposes of this study, pension figures include all public pension plans under

the responsibility of each jurisdiction, including retirement plans for police, fire,

teachers, transit authorities, and other types of public workers. For city and county

jurisdictions, the accounting of liabilities also includes their share of responsibility

for state-level plans.

The accounting of liabilities and assets comes from public financial reports, usually

directly from the city or county. In some cases of city or county share of state-level

obligations, the accounting of liabilities includes their share of responsibility of

state-level plans.

This study uses combined actuarially accrued liabilities (AAL) to represent the total

amount in pension obligations that have been promised to the jurisdiction’s public

workers. Combined plan actuarial value of assets (AVA) is used to determine the

amount the city, county, or state has on hand to uphold its pension promises.

Subtracting the combined assets from the combined liabilities gives the

jurisdiction’s total unfunded pension liability—the amount it is short on pension

obligations. Dividing these same components gives the funding ratio.

Notably, this analysis uses the most recently reported data from these jurisdictions,

which in all but one case is for FY 2019. In the nearly inevitable occurrence of

another few years of low returns on investment assets, liabilities will grow to be

larger than previously expected, meaning the unfunded liabilities are set to become

much higher than they are currently being reported.

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CONCLUSIONS

This study has explained that governmental owners of U.S. commercial airports were given

a new option by Congress in 2018 legislation: leasing airports via a long-term public-

private partnership (P3) agreement, under which the owner can legally receive the lease

proceeds and use them for general governmental purposes.

This study found that, based on valuation of overseas airports in recent privatization and P3

transactions, the large majority of the 31 airports owned by city, county, and state

governments would have significant net proceeds after paying off outstanding airport

bonds, as required by U.S. tax law. Only a handful may not be candidates for lease, unless

EBITDA multiples are higher than assumed here, since their estimated net value (after bond

payoff) is negative.

… the large majority of the 31 airports owned by city, county, and

state governments would have significant net proceeds after

paying off outstanding airport bonds, as required by U.S. tax law.

PART 7

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On the other hand, nine airports (including Atlanta, Charlotte, Los Angeles, and San

Francisco) have estimated net proceeds sufficient to eliminate their current pension system

unfunded liabilities, if the jurisdiction decided on that use of the proceeds. Another nine

could have enough lease proceeds to cover between 60% and 98% of their pension

system’s unfunded liabilities, including Dallas, Houston, Miami, and Phoenix.

Governments that contemplate P3 leases of any infrastructure assets need to weigh

alternative uses of the net proceeds against their pension fund needs, their overall

jurisdictional indebtedness, and their currently unbudgeted infrastructure needs. Those

would each be worthwhile uses of lease proceeds, as opposed to using such proceeds for

short-term budget-balancing.

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APPENDIX: AIRPORT

FACTORS AFFECTING P3

POTENTIAL

The 31 airports discussed in this study vary considerably in the mix of passengers served

and in their track record in generating revenue from various non-aeronautical sources—

such as parking, car rental, and retails sales in terminals. Also, the COVID-19 pandemic

devastated airline traffic in 2020 and the early months of 2021. International travel

remains depressed, and recovery in that portion of the airline business is not expected to

begin in serious numbers until 2022. However, domestic U.S. air travel is already

recovering, and many airlines are scheduling summer 2021 flights at close to pre-pandemic

levels.

First, of the 31 airports in this study, those that primarily serve domestic travel are likely to

be the most promising near-term candidates for P3 leases. To assess the differences among

these airports on this dimension, 2019 data on domestic and international passenger

boardings at the 31 airports were obtained from Airports Council International. Table A-1

presents the results, listed in order of the fraction of domestic passengers for each airport.

As can be seen, the results vary from essentially 100% for Albuquerque (ABQ) at the top of

the list to 51% for Miami (MIA) at the bottom. On this metric, the top 10 airports would

potentially attract the most near-term investor interest, since all 10 have domestic

PART 8

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56

passenger fractions between 97% and 100%. On a longer term basis, as international travel

recovers in 2022-23, the other airports in the table would become more attractive than

they would be in 2021.

TABLE A-1: AIRPORTS RANKED BY 2019 DOMESTIC PASSENGER SHARE

City

Airport

Code

2019 Int'l.

Passengers

2019 Domestic

Passengers

2019 Total

Passengers

Fraction Domestic

Albuquerque NM

ABQ

2,286

5,404,025

5,406,311

1.000

Kansas City MO

MCI

79,946

11,715,689

11,795,635

0.993

Milwaukee WI

MKE

108,399

6,718,751

6,827,150

0.984

New Orleans LA

MSY

218,035

13,426,631

13,644,666

0.984

Santa Ana CA

SNA

174,267

10,482,719

10,656,986

0.984

West Palm Beach FL

PBI

124,723

6,770,662

6,895,385

0.982

St Louis MO

STL

312,396

15,566,131

15,878,527

0.980

Dallas TX

DAL

334,604

16,445,554

16,780,158

0.980

Anchorage AK

ANC

85,636

5,640,523

5,761,552

0.979

Sacramento CA

SMF

340,645

12,832,195

13,172,840

0.974

Austin TX

AUS

530,387

16,813,342

17,343,729

0.969

Chicago IL

MDW

798,736

20,046,124

20,844,860

0.962

Salt Lake City UT

SLC

1,115,861

25,692,153

26,808,014

0.958

San Antonio TX

SAT

467,475

9,895,565

10,363,040

0.955

Baltimore MD

BWI

1,227,419

25,765,440

26,992,859

0.955

Phoenix AZ

PHX

2,112,167

44,175,623

46,287,790

0.954

Denver CO

DEN

3,175,199

65,840,504

69,015,703

0.954

Kahului HI

OGG

375,860

7,602,733

7,978,593

0.953

San Jose CA

SJC

864,260

14,786,184

15,650,444

0.945

Houston TX

HOU

850,804

13,604,503

14,455,307

0.941

Charlotte NC

CLT

3,564,266

46,604,517

50,168,783

0.929

Las Vegas NV

LAS

3,806,241

47,731,397

51,691,066

0.923

Atlanta GA

ATL

12,655,294

97,876,006

110,531,300

0.886

Philadelphia PA

PHL

4,082,374

28,936,512

33,018,886

0.876

Dallas/Fort Worth TX

DFW

9,578,478

65,488,478

75,066,956

0.872

Chicago IL

ORD

14,198,789

70,450,326

84,649,115

0.832

Houston TX

IAH

11,122,035

34,154,560

45,276,595

0.754

San Francisco CA

SFO

15,240,135

42,108,990

57,418,574

0.733

Honolulu HI

HNL

5,799,643

15,800,782

21,735,558

0.727

Los Angeles CA

LAX

25,098,811

60,595,693

88,068,013

0.688

Miami FL

MIA

22,383,751

23,540,715

45,924,466

0.513

Source: Airports Council International

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

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A second factor will likely be of interest to both potential investors and the airlines serving

the airport. This is the fraction of total airport operating revenue that is generated by “non-

aeronautical” sources. The way these figures are compiled by the Federal Aviation

Administration, aeronautical revenues include landing fees and various terminal charges to

airlines, while non-aero revenues include car parking charges, rental car fees, and retail

sales in airport terminals. From an airline’s perspective, an airport that fails to maximize

non-aero revenue places more of the burden on airlines to cover the airport’s operating

costs. And to investors, a low share of non-aero revenue suggests significant upside

potential, making the airport relatively more attractive to lease.

Table A-2 shows the results, based on data in FAA’s Certification Activity Tracking System

(CATS), which was also the source for this report’s Table 3A. Table A-2 lists the airports

from the lowest non-aero revenue share to the highest. The first five airports range from a

low of 16% (Anchorage) to 35% (Miami and Chicago Midway), suggesting large

improvement potential and stronger interest from investors and airlines. The six airports at

the bottom of the table all have non-aero revenue shares above 60%, which is in the

vicinity of privately managed (privatized or P3-leased) airports overseas.

TABLE A-2: AIRPORTS RANKED BY 2019 NON-AERONAUTICAL REVENUE

City

Airport Code

Non-Aero. Revenues ($M)

Total Revenues ($M)

Fraction Non-Aero

Anchorage AK

ANC

$21,821,431

$135,020,999

0.16

Chicago IL

ORD

$287,428,049

$1,061,913,580

0.27

Philadelphia PA

PHL

$135,473,999

$427,578,254

0.32

Miami FL

MIA

$291,593,743

$821,509,743

0.35

Chicago IL

MDW

$73,313,495

$206,532,791

0.35

Los Angeles CA

LAX

$570,722,513

$1,517,730,998

0.38

Houston TX

IAH

$159,276,884

$391,142,603

0.41

St Louis MO

STL

$59,220,641

$141,651,739

0.42

Honolulu HI

HNL

$124,467,206

$290,421,824

0.43

San Francisco CA

SFO

$421,622,548

$980,444,000

0.43

Baltimore MD

BWI

$106,813,960

$247,642,203

0.43

Las Vegas NV

LAS

$251,741,720

$537,780,891

0.47

Dallas TX

DAL

$70,816,882

$147,557,523

0.48

Dallas/Fort Worth TX

DFW

$506,502,925

$1,023,927,252

0.49

Denver CO

DEN

$424,307,567

$808,360,832

0.52

Santa Ana CA

SNA

$72,688,007

$136,836,377

0.53

Charlotte NC

CLT

$142,218,391

$267,318,001

0.53

Austin TX

AUS

$89,505,253

$167,283,587

0.54

Houston TX

HOU

$56,528,440

$105,404,998

0.54

Sacramento CA

SMF

$104,570,404

$185,926,590

0.56

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

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58

City

Airport Code

Non-Aero. Revenues ($M)

Total Revenues ($M)

Fraction Non-Aero

San Jose CA

SJC

$110,418,663

$194,690,769

0.57

New Orleans LA

MSY

$43,774,869

$76,882,817

0.57

San Antonio TX

SAT

$65,070,042

$113,489,751

0.57

Kahului HI

OGG

$42,206,519

$73,580,297

0.57

Albuquerque NM

ABQ

$32,848,846

$56,771,184

0.58

Salt Lake City UT

SLC

$105,673,660

$173,462,863

0.61

Phoenix AZ

PHX

$263,101,816

$429,012,982

0.61

Kansas City MO

MCI

$82,954,239

$129,597,996

0.64

Milwaukee WI

MKE

$51,931,474

$80,049,473

0.65

West Palm Beach FL

PBI

$47,809,581

$71,199,409

0.67

Atlanta GA

ATL

$387,801,842

$568,506,652

0.68

Source: FAA CATS database (https://cats.airports.faa.gov)

A third consideration is how rapidly (or not) airlines are resuming service at various

airports. A May 2021 report from Steer North American Aviation compiled figures from the

Official Airline Guide for 19 of the airports in this study, and the study’s author provided us

with data for the remainder of our 31 airports. Those data compare scheduled airline seat

capacity in May 2019 with the comparable figures for May 2021, as an estimate of the

recovery of air travel at these airports. Note that these figures represent airline-offered

seats, rather than actual passengers carried, but they do indicate airlines’ judgments about

which airline markets are recovering most rapidly. Airports making a faster recovery would

be more likely to have higher market value as of 2021 than airports making slower

recoveries. Table A-3 presents this data, in the form of the percentage change between

2019 and 2021 for each airport.

TABLE A-3: SELECTED AIRPORTS RANKED BY AIRLINES CAPACITY RECOVERY

City

Airport Code

Percent May 2021 vs May 2019 Capacity

Salt Lake City

SLC

104

Miami

MIA

100

Anchorage

ANC

94

Phoenix

PHX

94

Charlotte

CLT

93

West Palm Beach

PBI

92

Denver

DEN

90

Dallas & Ft. Worth

DFW

87

Dallas Love Field

DAL

82

Houston Hobby

HOU

80

Las Vegas

LAS

79

San Antonio

SAT

79

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

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59

City

Airport Code

Percent May 2021 vs May 2019 Capacity

Austin

AUS

77

Chicago

MDW

76

Atlanta

ATL

76

Houston

IAH

75

Santa Ana/John Wayne

SNA

73

Baltimore

BWI

72

Sacramento

SMT

72

Honolulu

HNL

67

Milwaukee

MKE

65

Kansas City

MCI

62

Chicago

ORD

61

St. Louis/Lambert

STL

61

New Orleans

MSY

61

Los Angeles

LAX

60

Albuquerque

ABQ

55

Philadelphia

PHL

55

San José

SJC

44

San Francisco

SFO

38

Source: Stephen Van Beek, “Tracking COVID-19 Aviation Recovery in the United States,” Steer North American Aviation,

May 2021

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60

ABOUT THE AUTHOR

Robert W. Poole, Jr. is director of transportation policy and the Searle Freedom Trust

Transportation Fellow at Reason Foundation, a public policy think tank based in Los

Angeles and Washington, D.C.

He was among the first to propose the commercialization of the U.S. air traffic control

system, and his work in this field has helped shape proposals for a U.S. ATC corporation. A

version of his nonprofit corporation concept was implemented in Canada in 1996. He has

advised the Office of the Secretary of Transportation, the White House Office of Policy

Development, the National Performance Review, the National Economic Council, and the

National Civil Aviation Review Commission on ATC commercialization. He is a member of

the Air Traffic Control Association and of the GAO’s National Aviation Studies Advisory

Panel. In 2012-13 he was a member of the Business Roundtable task force on ATC reform,

and in 2014-15 he was part of the Eno Center for Transportation working group on ATC

reform. In 2018 he received the Eno Center’s Thought Leader Award for his work on ATC

corporatization.

Poole’s Reason studies helped launch a national debate on airport privatization in the

United States. He advised both the FAA and local officials during the 1989-90 controversy

over the proposed privatization of Albany (NY) Airport. His policy research on this issue

helped inspire the privatization of Indianapolis airport management under Mayor Steve

Goldsmith and Congress’ 1996 enactment of the Airport Privatization Pilot Program.

SHOULD GOVERNMENTS LEASE THEIR AIRPORTS?

Reason Foundation

61

In aviation security, Poole advised the White House and House Republican leaders on what

became the Aviation & Transportation Security Act of 2001, enacted in response to the

9/11 attacks. He has authored a number of Reason policy studies on aviation security and is

the author of a paper on risk-based aviation security for the OECD’s International Transport

Forum.

Poole has testified on airports, aviation security, and air traffic control on a number of

occasions before House and Senate aviation and homeland security subcommittees, and he

has spoken on these subjects before numerous conferences. He has also done consulting

work on several airport privatization feasibility studies. Poole also edits a monthly Reason

Foundation e-newsletter on aviation policy issues. He received his B.S. and M.S. in

mechanical engineering at MIT and did graduate work in operations research at NYU.