Airport Privatization: Issues Related to the Sale of U.S. Commercial
Airports (Testimony, 02/29/96, GAO/T-RCED-96-82).

Congress and the aviation industry have expressed much interest in
airport privatization. Altering the current ownership and operation of
commercial airports could affect the nation's aviation system
considerably. Airports are major employers in many communities and
directly affect millions of airline passengers every day. This testimony
discusses (1) the current extent of private sector participation at
commercial airports in the United States and abroad; (2) the incentives
and the impediments to more-extensive forms of privatization, such as
selling an airport outright; and (3) the implications arising from
more-extensive privatization for major stakeholders, such as passengers,
airlines, and government.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-96-82
     TITLE:  Airport Privatization: Issues Related to the Sale of U.S. 
             Commercial Airports
      DATE:  02/29/96
   SUBJECT:  Privatization
             Foreign governments
             Profits
             Airports
             Air transportation operations
             Commercial aviation
             Economic analysis
             Airline industry
             Financial management
             Federal grants
IDENTIFIER:  John F. Kennedy International Airport (NY)
             LaGuardia International Airport (New York, NY)
             Newark International Airport (NJ)
             Greater Pittsburgh International Airport (Pittsburgh, PA)
             United Kingdom
             Airport and Airway Trust Fund
             Heathrow Airport (United Kingdom)
             Orange County (CA)
             Albany (NY)
             Atlantic City (NJ)
             Atlantic City International Airport (NJ)
             John Wayne Airport (CA)
             
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Cover
================================================================ COVER


Before the Subcommittee on Aviation,
Committee on Transportation and Infrastructure,
House of Representatives

For Release on Delivery
Expected at
9:30 a.m.  EST
Thursday
February 29, 1996

AIRPORT PRIVATIZATION - ISSUES
RELATED TO THE
SALE OR LEASE OF U.S.
COMMERCIAL AIRPORTS

Statement of Gerald L.  Dillingham,
Associate Director, Transportation and Telecommunications Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-96-82

GAO/RCED-96-82T


(341462)


Abbreviations
=============================================================== ABBREV

  BAA - British Airports Authority
  FAA - Federal Aviation Administration
  PFC - passenger facility charges

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss airport privatization. 
This issue has generated significant interest in the Congress and the
aviation community in recent years.  Altering the current ownership
and operation of commercial airports could have a considerable impact
on the nation's aviation system.  Airports are major employers in
many communities and directly affect millions of airline passengers
every day. 

Our testimony today is based on ongoing work requested by your
Subcommittee and will cover three topics:  (1) the current extent of
private sector participation at commercial airports in the United
States and foreign countries; (2) the incentives and impediments to
more extensive forms of privatization, such as selling an airport
outright; and (3) the implications arising from more extensive
privatization for major stakeholders, such as passengers, airlines,
and government.  I would like to summarize our findings: 

  -- First, commercial airports in the United States are almost
     without exception owned and operated by municipalities or
     states.  Nevertheless, the private sector plays a significant
     role in operating and financing U.S.  commercial airports,
     forming a close association with the airports' local municipal
     owners.  Private companies--airlines, concessionaires, and
     contractors--deliver most airport services.  Like a private
     entity, a substantial portion of airport development is financed
     through long-term debt raised in the capital markets.  And such
     debt is subject to the scrutiny of credit-rating agencies and
     investors.  The private sector's participation encourages
     airports to be efficient and commercially oriented in their
     operating and investment decisions.  Outside of the United
     States, a majority of airports around the world are owned and
     operated by their national governments.  However, in recent
     years, a growing number of countries have sought to sell or
     lease their airports to the private sector and discontinue
     government subsidies. 

  -- Second, legal and economic constraints currently inhibit more
     extensive privatization of U.S.  airports.  While the Federal
     Aviation Administration (FAA) has permitted and even encouraged
     some privatization, such as contracting for airport management
     or allowing private companies to develop and lease terminals, it
     has expressed concern about selling or leasing an entire airport
     to the private sector.  The FAA's concern is that the sale or
     lease of an airport would violate the obligations undertaken by
     the municipal owner as a condition of its federal grants.  Most
     notable is the obligation not to divert an airport's revenues. 
     In broad terms, federal law requires that a public airport's
     revenues be used for capital and operating costs.  FAA generally
     considers sale or lease proceeds to be airport revenue that
     cannot be transferred to other municipal uses.  Therefore, a
     public airport's financial incentives to privatize are reduced. 
     Other constraints could impede a privatized airport from being
     profitable by raising its cost of capital and ability to
     generate more revenues. 

  -- Third, predicting how various stakeholders might be affected by
     more extensive airport privatization is difficult because
     outcomes largely depend on how privatization might be
     implemented.  If sale or lease proceeds are not bound by federal
     restrictions on revenue diversions, then states and
     municipalities that own the airports could receive millions of
     dollars in proceeds.  Privatization's effect on airlines' and
     passengers' costs depends on whether airports' charges to
     airlines would continue to be regulated and whether privatized
     airports would have access to federal grants and tax-exempt
     debt.  Privatization's effect on the federal budget is
     contingent on whether private airports would have access to
     tax-exempt borrowing and whether privatization would lead to an
     overall reduction in the funding level for federal airport
     grants. 


   BACKGROUND ON U.S.  AIRPORT
   PRIVATIZATION
---------------------------------------------------------- Chapter 0:1

Privatization, broadly speaking, refers to reducing government's
involvement in providing services.  To what extent government control
is relinquished to the private sector depends on the means employed,
ranging from contracting for services to selling government assets or
operations. 

Enabling more extensive privatization at any of the nation's 567
public commercial airports\1 would depend on local, state, and
federal support.  Unlike the air traffic control system, whose assets
are owned entirely by the federal government, commercial airports are
owned by local municipalities and, in limited circumstances, states. 
However, because commercial airports also receive federal airport
development grants, have access to federal tax-exempt financing, and
are subject to federal regulatory control, federal laws can
substantially influence whether a public airport owner would chose to
sell or lease its airport.  Federal airport development grants are
funded through passenger and other taxes that are deposited in the
Airport and Airway Trust Fund.\2

Interest in airport privatization has heightened in recent years.  In
1989, Albany County, New York, sought to sell or lease its airport to
a consortium of airport developers and operators as a way to
eliminate the operating subsidies that the airport regularly drew
from the county.  While FAA objected to the county's proposal, which
Albany County eventually dropped, debate over privatization's
viability and legality continued.  An executive order issued in 1992
encouraged federal agencies to assist state and local governments'
efforts to privatize infrastructure assets, including airports.\3 An
executive order issued in 1994 affirmed the 1992 order and directed
federal agencies to seek greater private sector participation in
infrastructure investment and management.\4 Bills have been
introduced in the House and Senate to waive the requirements to repay
federal grants in order to encourage infrastructure privatization.\5
Both the House and Senate bills were referred to subcommittees and
have not yet been voted on. 


--------------------
\1 49 U.S.C.  47102 defines commercial service airports as publicly
owned airports that receive scheduled passenger service and enplane
2,500 or more passengers per year.  In addition, eight other airports
have a sufficient number of enplanements but do not meet other
criteria to be designated as commercial service airports. 

\2 For more information on airport development grants, see Airport
Improvement Program:  Update of Allocation of Funds and Passenger
Facility Charges, 1992-94 (GAO/RCED-95-225FS, July 17, 1995). 

\3 Executive Order No.  12803, "Infrastructure Privatization," dated
April 30, 1992. 

\4 Executive Order No.  12893, "Principles for Federal Infrastructure
Investments," dated January 27, 1994. 

\5 These are H.R.  1907 and S.  1063, "Federal-Aid Facility
Privatization Act of 1995."


   PRIVATE SECTOR PARTICIPATION AT
   AIRPORTS IN THE UNITED STATES
   AND OTHER COUNTRIES
---------------------------------------------------------- Chapter 0:2

Commercial airports around the world are attempting to reduce their
reliance on government support and make their operations more
businesslike.  In the United States, while almost all commercial
airports are publicly owned, airport services and financing are
linked extensively to the private sector.  In other countries,
commercial airports are typically owned and financed directly by
central governments.  In recent years, however, a number of countries
have sold or leased their airports to the private sector and
discontinued government subsidies. 


      PUBLIC-PRIVATE PARTNERSHIPS
      ARE THE NORM AT U.S. 
      COMMERCIAL AIRPORTS
-------------------------------------------------------- Chapter 0:2.1

U.S.  commercial airports have long sought to control their costs and
improve services by collaborating with the private sector.  While
local municipalities and, in a few instances, states own almost all
of the nation's commercial airports, we found that the bulk of
services, such as baggage handling, cleaning, retail concessions, and
ground transportation, are provided by private contractors or
tenants, according to officials at the airports we visited.  For
example, only 1,600 (less than 3 percent) of the 62,000 people who
work at the three airports--Kennedy, LaGuardia, and Newark--operated
by the Port Authority of New York and New Jersey are public
employees.  This ratio of public to private employees is typical of
the airports we visited.  According to the airport executives we
spoke with, reliance on the private sector is crucial to reducing
costs and improving services.  Some municipalities have gone so far
as to contract out the management of their entire airport to the
private sector.  While airport management contracts have tended to be
with smaller airports, in September 1995, the Indianapolis Airport
Authority signed a 10-year contract with a private firm to manage its
system of airports.  According to Indianapolis officials, the private
firm has guaranteed at least $32 million, and expects $140 million,
in cost savings and increased revenues over the life of the contract. 
Seventy percent of any savings will go to the airport authority,
which intends to use it to cut charges to airlines, and the rest will
go to the private contractor. 

Similarly, many airports have sought to operate in a more
businesslike manner by expanding and diversifying their sources of
revenue.  Industry analysts have noted a trend toward shorter and
more flexible operating agreements between airports and airlines,
which allow the airports to retain more revenue and more easily
renegotiate terms.  Airports have also sought to expand and diversify
their revenues, especially from retail concessions.  Our analysis of
82 commercial airports shows that only 20 percent of these airports'
total revenues are derived from landing fees charged to airlines,
while over 40 percent of total revenues are derived from concessions
and parking, 20 percent from terminal leases, and 20 percent from
other sources.\6 The Airmall\7 terminal at Pittsburgh International
Airport is a good illustration of this trend toward exploiting an
airport's retail potential.  In Pittsburgh, a private operator
manages the retail facility, which includes over 100 retail outlets,
for Allegheny County.  Since the mall opened in 1992, per passenger
retail spending has increased by 250 percent. 

Like private sector projects, airport development is financed to a
great extent through funds raised in capital markets and privately. 
However, unlike most private sector projects, public airports have
access to federal airport development grants, passenger facility
charges (PFCs), and tax-exempt debt.  Commercial airports have long
relied on tax-exempt municipal debt to finance their development. 
And airports' debt levels have grown substantially in recent years,
especially among larger airports.  According to the financial
statements of 22 of the nation's largest airports, average debt
levels nearly doubled from $445 million in 1988 to over $880 million
in 1994.  And like private companies, airports' financial performance
and investment plans are scrutinized by credit-rating agencies and
municipal debt insurers before capital can be raised.  Also, numerous
airport facilities, including terminals at Kennedy, O'Hare, and
Cincinnati, were privately paid for and developed.  For large
projects, private developers have used their own capital and special
facility bonds.\8


--------------------
\6 Based on an analysis of airport financial statements for the most
recent reporting period as provided by Van Kampen American Capital
Management's Merritt System Airport Database.  Generally, these
airports are among the largest in the United States. 

\7 Airmall is a registered trademark by BAA USA, Inc. 

\8 Generally, special facility bonds are tax-exempt debt issued by
the airport and backed by the lease revenues from private tenants,
typically airlines. 


      AIRPORT PRIVATIZATION IS
      GAINING POPULARITY IN OTHER
      COUNTRIES
-------------------------------------------------------- Chapter 0:2.2

In recent years, many countries have adopted extensive privatization
programs within their economies.  These countries have privatized
many parts of their infrastructure, including airports, trucking,
telecommunications, railroads, and shipping.\9

Generally, these countries' privatization policies have been driven
by a desire to reduce the size of the public sector and to improve
economic efficiency. 

We identified airport privatization efforts in 47 countries.  These
efforts vary from selling minority shares in individual airports or
inviting private developers to construct runways or terminals to
leasing or selling the country's major airports.  For example, in
December 1995, the Mexican government approved legislation that would
allow private operation of its 58 airports.  Key features of the
legislation include 50-year renewable leases between the government
and a private operator and limits on participation by foreign
companies and airlines. 

The United Kingdom, which privatized its commercial airports in 1987,
is one of the few cases where airport privatization is far enough
along to provide measurable results.  To privatize, the United
Kingdom sold the government corporation--British Airports Authority
(BAA)--which operates seven major airports, including London's
Heathrow and Gatwick airports, in a $2.5 billion public share
offering.  Even after privatization, the airports remain subject to
government regulation of airlines' access, airports' charges to
airlines, safety, security, and environmental protection.  The
government also maintains a "golden share" that allows it to veto new
airport investment or divestiture.  BAA has generated profits every
year since 1987 and is now valued at $4.5 billion.  Owing to steadily
increasing passenger traffic and growth in retail revenues, BAA
generated $455 million in profits for its shareholders in 1995,
despite government-imposed caps on charges to airlines and $782
million in infrastructure improvements, including a rail link to
central London from Heathrow International Airport. 

The privatization of BAA has not been without its critics, however. 
Some private economists have noted that by selling BAA's seven
airports together, instead of separately, the United Kingdom's
government did not maximize its sale price or instill greater
competition.  Rather, these critics charge that the government
converted a public asset into a regulated private monopoly. 


--------------------
\9 For additional information on other countries' privatization
efforts, see Budget Issues:  Privatization/Divestiture Practices in
Other Nations (GAO/AIMD-96-23, Dec.  15, 1995). 


   DESPITE INCENTIVES, SIGNIFICANT
   IMPEDIMENTS CURRENTLY BLOCK
   MORE EXTENSIVE PRIVATIZATION IN
   THE UNITED STATES
---------------------------------------------------------- Chapter 0:3

In recent years, the idea of turning commercial airports over to the
private sector has generated considerable interest.  Despite this
interest, more extensive privatization remains largely untested
because of legal barriers, economic constraints, and opposition from
airlines and the FAA. 


      INCENTIVES TO PRIVATIZE
-------------------------------------------------------- Chapter 0:3.1

Several factors are motivating the current interest in more-
extensive privatization of commercial airports in the United States. 
First, commercial airports generate significant revenues, in some
cases exceeding $100 million annually.  Second, well-capitalized
firms with experience in airport management and development have
emerged in response to the demand created by privatizations
worldwide.  These firms believe that many U.S.  airports possess
considerable untapped profit potential and have aggressively sought
greater opportunities in the United States.  Third, funding levels
for federal airport grants have dropped from $1.9 billion in fiscal
year 1992 to $1.45 billion in fiscal year 1996.  Accordingly, some
airports are eager to tap alternative sources of revenue, according
to airline industry representatives.  Fourth, municipalities facing
budget problems view their airports as a potential source of fiscal
relief. 


      FEDERAL GRANT REQUIREMENTS
      POSE LEGAL IMPEDIMENTS TO
      PRIVATIZATION
-------------------------------------------------------- Chapter 0:3.2

Thus far, all but one attempt to sell or lease a commercial airport
in this country has been abandoned after encountering various legal
obstacles.  Privatization proponents and legal experts believe that a
lease arrangement, whereby the public authority retains ownership and
some control, faces fewer hurdles than an outright sale. 
Nevertheless, FAA has opposed lease-based privatization proposals for
some commercial airports, citing statutory problems and concerns
about privatization's effect on the national aviation system.  For
example, in 1995, Orange County, California, sought to sell John
Wayne Airport as a way to obtain revenue for its general fund after
the county filed for bankruptcy in December 1994.  The county
abandoned its privatization effort after concluding that any sale or
lease proceeds could not be retained for its general fund. 

Under grant agreements, FAA must approve the transfer of any
commercial airport, whether the transfer is to a public or private
entity.\10 In opposing proposals for selling or leasing airports to
private companies, FAA has cited a concern that a private owner or
lessee would not be able to satisfy the legal obligations that the
airport made as a condition of obtaining a federal grant.\11

According to FAA, these legal obligations cannot be extinguished by
repaying grants to the federal government. 

A grant assurance that is frequently cited as an obstacle to
privatization concerns the use of airports' revenues.  Current law
requires that public airports' revenues be used exclusively to pay
for the airports' capital and operating costs and cannot be diverted
for nonairport purposes.\12 Although FAA currently considers
airports' revenues to include lease or sale proceeds subject to this
law, states and local governments would be entitled to recover any
unreimbursed capital or operating costs that they have incurred.  It
is uncertain which costs would be reimbursed--for example, if a rate
of return is allowed.  Reimbursement would likely be an issue for
discussion between FAA and the airport in any privatization
proceedings.  Therefore, the financial benefits that might accrue to
municipalities from privatizing airports are uncertain. 

FAA has not universally applied its broad interpretation of what
constitutes revenue, however.  In 1986, Atlantic City, New Jersey,
leased its terminal at Atlantic City International and its general
aviation airport to a private management firm.  The lease required
minimum payments of $400,000 annually to the city.\13 FAA officials
cannot fully explain why Atlantic City was allowed to divert revenue
in 1986, when the agency opposed similar lease proposals by Albany
County in 1989, Los Angeles in 1992, and Orange County in 1995. 

Another legal issue concerns whether federal grants and donations of
surplus federal property would have to be repaid from sale or lease
proceeds.  Since 1946, the federal government has awarded over $23.5
billion in airport grants and donated an unknown value of surplus
federal property to assist in the development of airports.  Under
current law, when an airport's asset is sold and no longer used for
its originally intended purpose, the federal government can seek
reimbursement for its share in assets acquired through grants, while
surplus federal property would automatically revert to the federal
government.  If assets are transferred from a public to a private
owner but continue to serve their originally intended purpose, it is
less likely that the federal government would claim any
reimbursement, according to FAA officials.  FAA has not sought any
reimbursement when airport ownership has been transferred between
public entities, in part because the airport was still used for its
originally intended purpose.  However, when a privatized airport no
longer uses an asset for its original purpose, then the federal
government could make a claim for reimbursement against the private
owner.  Bills introduced in the last Congress (H.R.  1907 and S. 
1063) would allow the Secretary of Transportation to waive state and
local governments' obligations to repay federal grant moneys when
there was a legal agreement or regulation requiring that the
privatized asset continued to serve its originally intended purpose. 


--------------------
\10 FAA's grant program handbook (Order 5100.38A) states that, for
publicly controlled airports, grant obligations shall remain in
effect for the useful life, up to 20 years, of any facilities
developed or equipment acquired with grants and shall remain in
effect indefinitely for any real property acquired with grants. 

\11 See 49 U.S.C.  sections 47101 through 47131. 

\12 49 U.S.C.  section 47107 (b) allows public airports with
preestablished revenue-sharing legislation or debt covenants to
legally take some revenue from the airport.  We found only a few
airports that qualify for this provision.  Private airports are not
similarly bound by revenue diversion restrictions. 

\13 In 1992, Atlantic City sold the main airport terminal to a new
public transportation authority for $11.3 million and annual payments
of $500,000.  Under P.L.  102-143, the Congress specifically exempted
this transaction from revenue diversion restrictions.  A private firm
continues to operate the airport under a lease. 


      FEDERAL FINANCING AND
      AIRLINES POSE ECONOMIC
      IMPEDIMENTS TO PRIVATIZATION
-------------------------------------------------------- Chapter 0:3.3

A privatized airport's ability to operate profitably under current
rules and conditions is unknown.  The loss of federal airport
apportionment grants, PFCs, and tax-exempt financing would raise
airports' financing costs significantly.\14 Together, these sources
of finance generally constitute the majority of an airport's capital
base.  In fiscal year 1995, commercial airports' apportionment
funding accounted for about one-third of the total $1.45 billion
federal grant program's funding level.\15 Additionally, between 1992
and January 1996, 244 airports have been approved to collect more
than $12.5 billion in PFCs.  However, a privately owned airport could
legally collect other types of passenger usage fees to replace lost
PFC revenues.  Finally, according to public-finance professionals,
the loss of tax-exempt status for airport debt would add at least 2
percentage points to an airport's cost of debt capital.  For example,
a $100 million debt issue would cost an airport at least $2 million
more in additional interest costs each year. 

In addition to more expensive capital, a private airport owner or
lessee could encounter constraints on its revenues, making it more
difficult to recover its investment costs, for two reasons.  First,
FAA's current policy on rates and charges prohibits airports from
increasing their charges to airlines to reflect the costs of
appreciated or revalued assets or to earn a return on investment.\16

Therefore, a private owner or lessee would have to recover its
investment from an airport's nonaeronautical operations--for example,
from retail concessions.  Second, a private buyer or lessee may need
to renegotiate the airport's agreements with its tenant airlines. 
Often these agreements, which are generally long-term and govern how
the airport is operated and methods for charging aeronautical and
nonaeronautical fees, restrict how much and in which ways an airport
can make a profit.  Some of these agreements, known as residual
agreements, require the airport to return any profits to the airlines
in the form of lower fees.  According to officials from the airlines
that we spoke with, they almost universally oppose the sale or lease
of airports, in part because they fear that their airport-related
costs would increase.  Therefore, airlines would likely be hesitant
to renegotiate their airport agreements with a new private owner if
they believed it would increase their costs. 


--------------------
\14 FAA provides airport development grants under two broad
categories--either apportionment or discretionary.  Apportionment, or
"formula," grants are available to all public airports on the basis
of the number of passengers enplaned and other factors.  Privately
owned airports may not receive apportionment grants.  Both publicly
and privately owned airports are eligible for discretionary grants,
which go to projects that address goals established by the Congress. 
The Congress, in 1990, authorized publicly owned commercial service
airports to charge each passenger a $1, $2, or $3 PFC per trip. 

\15 In fiscal year 1995, the Congress provided commercial airports
with $729 million in apportionment grants before the imposition of
statutorily required cuts.  After cuts were imposed to meet other
statutory requirements, commercial airports' actual apportionment
funding was just over $450 million. 

\16 On September 8, 1995 (60 Fed Reg 47017), FAA proposed a change to
its rates and charges policy which would allow private airport owners
to charge their tenant airlines rates that would provide a reasonable
return on investment.  FAA has not made this policy change final. 


      FAA'S UNCLEAR INTERPRETATION
      OF PRIVATIZATION POLICY
      IS AN IMPEDIMENT
-------------------------------------------------------- Chapter 0:3.4

FAA has not clarified its interpretation of various legal,
congressional, and presidential directives.  Instead, according to
FAA officials, they consider each privatization proposal separately. 
The lack of guidance is an impediment in itself, according to
privatization proponents, in that any attempt to sell or lease an
airport is likely to encounter a long and costly legal contest.  The
lack of any succinct privatization policy can be tied, in part, to
differing policy direction from the Congress and an executive order. 
Executive Order 12803 encouraged federal agencies to approve state
and local governments' requests to sell or lease infrastructure as
long as it continued to be used for its intended purpose.  Meanwhile,
in August 1994, the Congress directed FAA to issue policies and
procedures related to revenue diversion because of concerns about
possible abuses by some airports.\17 On February 26, 1996, FAA issued
its proposed policy on airport revenue diversion for public comment. 
FAA's proposed policy still considers sale or lease proceeds to be
revenue subject to diversion restrictions.  The proposed policy also
states that FAA would consider privatization proposals on a
case-by-case basis.  However, encouraging more extensive
privatization while meeting revenue diversion requirements is
difficult as long as FAA considers sale or lease proceeds to
constitute airport revenue that is subject to diversion restrictions. 


--------------------
\17 Section 112 of the Federal Aviation Administration Authorization
Act of 1994, P.L.  103-305 (enacted Aug.  23, 1994), required the
Secretary of Transportation to establish revenue diversion policies
not later than 90 days after enactment. 


   MUNICIPALITIES WOULD LIKELY
   BENEFIT, WHILE PRIVATIZATION'S
   OTHER EFFECTS ARE HARDER TO
   PREDICT
---------------------------------------------------------- Chapter 0:4

It is difficult to predict how more extensive privatization would
affect state and local governments, airlines, passengers, and the
federal government because so many assumptions have to be made about
how privatization might be implemented.  However, some general
observations can be made on the basis of the current situation and
likely scenarios: 

  -- The effect of more extensive privatization on local governments
     depends on whether restrictions on revenue diversion are changed
     and municipalities could retain all privatization proceeds.  If
     municipalities are able to privatize their airports and retain
     all privatization proceeds, then they could expect to reap a
     financial windfall.  In addition, municipalities would benefit
     from adding airports to their local tax bases.  It is difficult
     to estimate how much a municipality could expect to gain by
     selling or leasing its airport.  Although airports have billions
     of dollars in reported assets, such assets are not an accurate
     measure of market value, which may be substantially more or
     less.  An airport's market value principally depends on the
     present value of its future earnings, which in turn depends on
     the manner in which it is privatized and the constraints imposed
     and subsidies granted by various levels of government. 

  -- The effect of more extensive privatization on airlines largely
     depends on how the rates charged to airlines by airports are
     regulated and if privatized airports remain ineligible to
     receive apportionment grants and tax subsidies.  First, FAA's
     policy on rates and charges prohibits airports from charging
     airlines market-based rates.  If this policy is changed,
     airports could generally raise their fees because they face only
     limited competition.  Other countries that have privatized
     airports generally impose some form of price regulation on
     airports' charges to airlines.  For example, in the United
     Kingdom, airline charges are capped at historical rates plus an
     inflation factor.  Second, under current law, a private
     commercial airport would no longer receive federal apportionment
     grants or tax-exempt financing, which could increase an
     airport's costs and, correspondingly, the fees it might charge
     airlines.  According to the airlines we spoke to and other cost
     studies, airport costs average about 5 percent of airlines'
     total costs.  However, the airline industry is also highly
     competitive and historically has a profit margin one-half that
     of the average U.S.  company in other industries.  Therefore, a
     small cost increase could have a pronounced effect on
     profitability. 

  -- The effect of more extensive privatization on passengers depends
     on the extent to which airlines' costs increase and the degree
     to which airlines adjust their ticket prices in response to rate
     changes.  According to economic studies,\18

passenger traffic is very sensitive to changes in ticket prices. 
These studies show that a 1-percent increase in ticket prices may
lead to more than a 1-percent decline in passengers.  Therefore,
airlines are cautious in passing on cost increases to passengers. 

  -- The effect of more extensive privatization on the federal budget
     depends on whether privatized airports are denied tax-exempt
     status and federal apportionment grants.  Privatization
     proponents complain that providing these benefits to public
     airports but not private ones creates an unlevel playing field. 
     Access to tax-exempt debt represents significant cost savings
     for public airports.  According to public-finance professionals
     we spoke to, the interest rate on taxable bonds is generally 2
     to 2.5 percentage points higher than tax-exempt debt with
     equivalent credit risk.  According to one rating agency, an
     estimated $25 billion in tax-exempt airport debt is currently
     outstanding.  In aggregate, using a 2-percentage- point
     differential, this translates into $500 million in potentially
     taxable revenue forgone each year.  Therefore, removing
     tax-exempt status for commercial airports that privatize could
     result in more federal revenues.  More extensive privatization
     could also affect the funding level for airport grants.  In
     fiscal year 1995, the federal apportionment grant funding level
     for commercial airports was about $450 million.  The effect on
     apportionment grants would depend on whether grants that
     previously went to a public airport would be redirected to other
     airports or if the overall funding level for the grants program
     would be cut. 


--------------------
\18 Report to Congress:  Child Restraint Systems, U.S.  Department of
Transportation, Federal Aviation Administration (May 1995),
summarizes 25 economic studies on the relation of ticket prices to
the demand for air travel. 


-------------------------------------------------------- Chapter 0:4.1

Mr.  Chairman, this concludes our prepared statement.  We would be
happy to respond to any questions you or the Members of the
Subcommittee may have. 


*** End of document. ***