Many countries have privatised various sectors in recent decades to improve their economies. Airports are a notable example of this. They are now seen more as businesses than just public service providers.
At the end of 2020, about 20% of airports worldwide had been partly or fully privatised. This share has skyrocketed since the turn of the millennium, with the largest aviation hubs (responsible for around 40% of worldwide traffic) leading the way.
Airport management is changing due to this shift, and there are worries about what lies ahead for aviation. In this article, we’ll examine airport privatization and the good and bad sides of using this business model to run airports.
Understanding the Concept of Airport Privatization
Airport privatisation is not a new concept. The UK, Australia, and Canada are often cited as the 1980s forerunners of this idea. In airport privatization, the government and private enterprises work together to improve airport operations. A big reason why this is popular is because more and more people are using airports. According to projections by IATA, the number of airport users will increase from 4 billion in 2016 to 7.8 billion by 2036. As more people travel, airports need to get bigger and offer better services. This is challenging for the government, which doesn’t have much money, so teaming up with private companies helps make it possible. Privatization allows airports to offer more services without government interference, reducing the need for public funds and inviting private businesses. This could create fresh financial incentives for airport management and staff, fostering improved operational efficiency. Airport privatisation encompasses a spectrum of cooperation levels, spanning from basic service contracts to extended leases or outright sales.- Service Contracts: Airports often contract out certain non-core tasks to specialised private firms. This includes services like cleaning, landscaping, shuttle bus operations, and concessions within the airport.
- Management Contracts: Airports sometimes seek private sector expertise by contracting out specific facilities or functions, such as parking management, terminal concessions, airfield signage, and fuel farms. Sometimes, private management companies are contracted to oversee an entire airport for a defined period.
- Developer Financing/Operation: Various contract types engage the private sector in developing, financing, maintaining, and operating airport services. This is exemplified by the Design-Build-Finance-Operate Maintain (DBFOM) model. This approach is seen in Terminal 5 at Chicago O’Hare International Airport and Terminal 4 at New York John F. Kennedy International Airport, where it’s used for passenger terminals, parking garages, and rental car facilities.
- Long-Term Lease or Sale: This is full privatization. It entails selling or leasing an airport to a private entity, granting them control over management and development. This often involves capital investments, upfront payments, and profit-sharing. Alternatively, a full sale transfers ownership and operational responsibility to a private buyer. This approach is mainly used in European airports.
Examining the Potential Benefits of Airport Privatization
Privatizing airports can offer several potential benefits, such as:- Improved Efficiency: Private entities are generally more efficient than government-run ones. Private operators strive for efficiency and often introduce automation, making airports more reliable and cost-effective. In contrast, government-managed airports often hesitate to adopt automation due to labour-related challenges and associated costs.
- No Burden on Taxpayers: Privatised airports operate independently, relying on revenue from passengers, airlines, and advertisements instead of taxpayer grants. This shift to a market-based approach sets rates based on demand and supply, preventing the use of taxpayer money and ensuring self-sustainability.
- Improved Air Travel Experience: Airport privatisation can enhance air travel quality by streamlining operations and upgrading infrastructure. As a result, passengers can benefit from smoother connections, improved security, and better services, leading to higher satisfaction levels regardless of their travel destinations.
- Quick Decision-making and Flexibility: Private operators can make fast decisions, unlike slow-moving bureaucratic government bodies. This agility allows quick implementation of improvements, expansions, or tech upgrades. Flexible decision-making lets airports respond promptly to market needs and changing travel patterns, aligning with customer demands and industry shifts.
Advantages of Privatization for Airports and Airlines
Privatizing airports can benefit both airports and airlines in several ways, such as: Upgrades and Investments: Building and running airports require a lot of money because technology keeps changing, and keeping up is expensive. Governments can’t update all airports at once due to limited funds. However, private companies can improve airports and make money by charging customers. Better Infrastructure and Safety: When private companies manage airports, they have a strong reason to invest in and enhance safety measures and infrastructure. This enhances safety for travellers, and improved infrastructure allows for more air traffic without huge time and money investments. Competition and Lower Costs: Privatizing airports leads to more airports being built near major cities. Most big European cities have multiple airports, creating a competitive environment. Airlines can choose airports that offer better terms, encouraging airports to operate efficiently and lower costs. Improved Services and Quality: Private companies often focus on making customers happy by providing excellent service and amenities. This competition among airports boosts passenger experiences, improving the overall travel experience. Customised Solutions: Privatization helps customise services to match local people’s needs and wants. Private operators can tailor their approaches to meet the needs of their communities since they are more flexible and responsive to local conditions.Analysing the Potential Drawbacks of Airport Privatization
Airport privatisation has potential drawbacks, which should be carefully considered and mitigated when contemplating such a transition. Here are some key drawbacks associated with airport privatization:- Expensive to Run: Government-run airports often use special tax-exempt bonds to fund operations, which makes it cheaper for them. Private businesses have less access to federal funding, putting them at a financial disadvantage compared to government-run airports. As a result, private airports are likely to be more costly to run despite potential efficiency improvements.
- Legal Limitations: Some countries have legal restrictions on how money from airport privatisation can be used. In the United States, for instance, the proceeds from airport lease or sale must be spent only on airport-related expenses.
- Bad for Major Airlines: Major airlines often prefer airports to remain publicly owned because they get special treatment as anchor tenants. If airports become privatised and expand, it may increase competition and affect these airlines’ profits.
- Monopoly: A study by IATA found that private airports usually make travel more expensive. Unlike the airline industry, where competition lowers customer prices, airports can become monopolies, imposing higher fees on airlines and passengers.
