The Argument for Privatization of Airports

Privatization of airports is not a new idea. Many politicians have implemented it as an important economic policy.

• Margaret Thatcher was one of the first politicians to use privatization as an important policy measure. Her government privatized essential entities like the British Airways as well as the Heathrow airport in the 1970’s.

• Donald Trump has been a crucial supporter of airport privatization. Given the fact that he is the President of the United States and one of the most important people in the world, his opinion is really important. Donald Trump wants to sell the airports which he thinks are a drain on taxpayer money. He wants to use the funds raised to improve the infrastructure of the inner cities. He claims that over a trillion dollars will be required to rebuild the infrastructure and some of the money needs to be raised by privatizing the airports.

• Emmanuel Macron, the new French President, also has plans which are similar to that of Donald Trump. He also believes that he should sell out the Paris airport and the other airports that are held by the government. He had already sold airports of smaller cities like Nice when he was an economic minister in the previous regime. He is known not to give the private sector an edge as he negotiates high prices for the government.

The above examples show that there is a growing impetus towards privatization of airports. In this article, we will understand the advantages and disadvantages of this exercise.

Advantages of Privatization

1. Greater Efficiency: The most apparent benefit of any form of privatization is the fact that efficiencies increase. Private organizations are more efficient than their public sector counterparts. Privatization of airports gives the shareholders the incentives to study the processes and introduce automation. Automation makes the airport more reliable and able to operate at a lower cost. Government run airports will not think of automation under normal circumstances since they cannot replace labor with machines without paying out hefty severance settlements.

2. No Loss of Taxpayer Money: All the above-mentioned politicians believe that airports must be run by money that is generated by flights. Airports should not be run on public money, i.e., based on taxpayer grants. Once airports are privatized, their source of revenue is based on collections from passengers, airlines, and advertisements. They do not receive any grants from the taxpayer money. This brings the market mechanism into action. The rates are set based on demand and supply instead of being set by a bureaucrat resulting in loss of taxpayer money.

3. Competition and Lower Costs: Privatization of airports leads to more airports in the areas surrounding important cities. Almost all major European cities have more than one airport. The end-result is that airports have to compete amongst themselves. The airlines have the option to choose the airport that gives them a better deal. This gives airports the incentive to operate more efficiently and lower their costs.

4. Upgrades and Investments: Construction and management of airports is a capital-intensive business. This is because newer technologies come in every few years and there are significant costs to update to more modern technologies. The government cannot afford to upgrade all the airports simultaneously. However, private companies can improve the airports and keep recovering the costs from the customers.

Disadvantages of Privatization

There are several disadvantages to the privatization of airports as well.

1. Expensive Financing: Firstly, when the government finances the airport it does so by using tax-exempt bonds. Since these bonds are tax exempt, people are ready to lend money to the government at a lower rate than they generally do. This is because their effective after-tax return remains unchanged. Private companies do not have this luxury of cheap financing. Hence, even though they may increase operational efficiencies, the private companies are at a serious competitive disadvantage when it comes to financial structure. As a result, private airports are likely to be more expensive despite the increased efficiency.

2. Legal Hurdles: Many states and nations have laws that prevent them from utilizing the proceeds of privatization in a manner that they may deem to be fit. In the United States, for instance, the law states that proceeds from the sale of airports can be used only for airport-related costs by the government. The government cannot utilize these sale proceeds to build a road or a dam! These laws will need to be changed. It is well known that changing any law is a time consuming and expensive process. However, given the numerous benefits that are likely to accrue this may well be worth the costs.

3. Vested Interest from Airlines: Big airlines have a vested interest in keeping the airports in public hands. This is because they are like anchor tenants in a mall. They enjoy special privileges because of their size relative to the limited capacity. The capacity addition would mean an increase in competition. This may impact the bottom line of these airlines negatively.

To sum it up, the privatization of airports is a hot topic globally. Politicians from all over the world are willing to experiment with this idea. It has its pros and con. From preliminary analysis, it seems like the benefits far outweigh the costs.