70: Plane commonsense
Commercialization of state airports
The problem: terminal diseases
Air travel is now no longer the domain of the few. Increasing wealth and advances in aircraft design encouraged an enormous increase in the demand for air travel. Air freight has also become far more important. As state-owned corporations, dependent on the government for investment funds, many of the world's airports are struggling to keep up with demand.
The idea: de-constrain supply
Although there is a world-wide tendency for airports to be operated as (inefficient) national or regional prestige symbols, there is no good reason why governments should own and manage airports,
In the United Kingdom, Mrs Thatcher's government decided to privatize the British Airports Authority, the country's main provider of airports (such as London Heathrow and London Gatwick), by public share issue.
A number of smaller airports, owned by local government authorities (and including Cardiff, East Midlands and Bristol) have also been sold to private-sector operators. Others such as Luton, Birmingham International and Liverpool Speke are managed under long-term leases by private consortia.
Example: flying forward
The major assets which the British Airports Authority (BAA) controlled were the three main airports serving London and the South-East of England (Heathrow, Gatwick and Stansted), and the three main airports in Scotland (Glasgow, Edinburgh and Aberdeen).
Mrs Thatcher's government chose to privatize BAA as a single regulated enterprise, instead of attempting to sell its airports individually and so introduce more competition into the system (as many experts, including the Adam Smith Institute, had recommended). Nevertheless, it was anticipated that privatization would allow managers to escape from bureaucratic controls, and to raise much-needed development capital from the private markets - and would bring cash into the Treasury.
There were several reasons for this. Privatization was still a new concept and it was not clear how far individual airports could be sold. The government knew it could get a higher price for an enterprise that controlled so many airports, but believed it could use regulation to prevent the abuse of its monopoly power. And the Authority itself argued that it was hard to disaggregate its assets, particularly the three airports which serve London.
Privatization did indeed give BAA plc (as the operator became) access to the international capital markets, and allowed it to upgrade its terminal facilities very quickly. It soon realized that it could generate much greater revenues from the better use of terminal buildings, developing new shopping malls, cafés, and other facilities for passengers. The expertise it acquired in developing this retailing business has enabled BAA to diversify into the management of airport buildings in other countries, and even the redesign of hospital waiting areas around shopping and food malls.
Privatization also provided the incentive for senior management to tackle inefficient work practices; their own personal rewards were undoubtedly a spur. However, improvements in labour productivity were more marked in the run-up to privatization than in the post-privatization era; everyone knew that in order for privatization to succeed, the company had to come to market with better human-resource and management systems already in place.
BAA's pre-tax profitability climbed consistently since privatization with the exception of 1991 and 1992, when airline travel was badly hit by economic recession and the Iraqi invasion of Kuwait. Pre tax profits for the year to March 1999 totalled £516 million. However, like many parts of the travel industry, Britain's airports have since suffered a downturn as a result of the terrorist incident of 11 September 2001 and the general economic slowdown,
Quality of service has improved. In its quinquennial review, the Competition Commission (Britain's anti-trust authority) points out, "BAA's quality of service is generally rated highly by passengers, despite the pressure on capacity at the busiest airports."
Assessment: travelling experience
BAA is a star performer among those UK public corporations privatized since 1979. Sir John Egan, BAA's chief executive until 1999, observes that privatization enabled management to "design a company around market principles, not one around the principles of bureaucracy."
Privatization has accordingly given BAA's management much greater freedom to manage, but government regulation and planning controls still play a key role in the company's domestic market. For example, airport landing and take-off slots are still allocated through rationing, with incumbent operators having the pick of the best slots, no matter how small or how empty their aircraft. All airlines are keen to fly into Heathrow, the main hub; government changes in the traffic distribution rules in 1991 made the problem even more acute. For its part, BAA was keen to entice airlines into the new and much less congested Stansted; but there was no price mechanism to help them do this.
On the other hand, much of BAA's profitability may stem from the near-monopoly it has in Scotland and in the South-East of England. The company argues that its three London airports are in competition with continental hubs such as Paris, Amsterdam and Frankfurt. This defence is questionable: it nevertheless enjoys a dominant monopoly in the South East.
Regulation has been another difficult issue. The regulation of the newly-privatized enterprise was designed principally to prevent the abuse of its near-monopoly power in terms of charges, quality of service, and the access to its runway facilities. However, the main tool of the regulation was a price cap on charges. Some airlines argued that this encouraged the company to economize on the quality of service it offered.
A further difficulty was that the whole of BAA's operation was caught under the same regulatory control. But meanwhile, the company developed a completely new and large revenue stream from its retail developments at the airports. These, it argued, were properly competitive, having to compete for trade against the high streets and the other airports of the world: they should not be subject to the same price regulation that was designed to prevent monopoly abuse of runway access. Eventually, in 2001, this 'single till' regulation of BAA's airport facilities was replaced by a system that is intended to be more sympathetic to the development of non-monopoly, non-core business.
Despite the recent development of non-BAA airports such as Glasgow Prestwick and London Luton (the hub for the rapidly-growing no-frills airline Easyjet - see the chapter Freedom of the Skies), BAA's near-monopoly continues to cause concern. It may well be only a matter of time before the South-East nexus is broken up, with Heathrow competing directly against Gatwick and Stansted.
Meanwhile, other UK airports have been sold in different ways. Belfast International, for example, was bought for £32.7 million in a management-employee buyout (MBEO) in July 1994. (For other examples of privatization through employee buyout, see the chapter Freely Employed). However, two years later it was sold on to the TBI Group, the owners of Cardiff Airport, for £107 million: the quick profit of £74 million made by the MBEO attracted much criticism. But in fairness, it has to be said that the employees and manager were taking a big risk by offering to buy the airport; and that if quick re-sales are regarded as a problem in any privatization measure, it is easily possible to guard against them by inserting loyalty clauses to prohibit a rapid sell-on, or by having 'clawback' arrangements so that any fast resale profits are shared with the state or national government.
All in all, though, it is evident that airport privatization brings many benefits, which explains why the idea has spread so rapidly around the world.
For further information:
- Every five years the UK Monopolies & Mergers Commission (now the Competition Commission) has undertaken a review of the performance of the BAA; see www.competition-commission.org.uk.
- The UK House of Commons Transport Select Committee has also published several reports on various aspects of BAA's activities. In autumn 1999 it began an inquiry into the merits and drawbacks of BAA's dominant monopoly in the South East: see www.parliament.the-stationery-office.co.uk.
- See also BAA report & accounts (BAA maintains a detailed website at www.baa.co.uk).
- There is a useful chapter reviewing BAA's post privatization performance in Boyfield, Keith (1997) Privatization: A Prize worth Pursuing? European Policy Forum (London).
- Starkey, David and Thompson, David Privatising London's Airports: Options for Competiton, Institute for Fiscal Studies (London) Report Series 16.
- Starkey, David and Thompson, David (1986) 'London's Airports: The Privatization Options' in Kay, John (ed.), Privatization & Regulation- The UK Experience: Oxford University Press.
- Boyfield, Keith (1994) Plane Commonsense: Adam Smith Institute (London) www.adamsmith.org.
- Barrett, Sean (1982) Airports for Sale: Adam Smith Institute (London) www.adamsmith.org.
- Adam Smith Institute (1983) Omega Project: Transport Policy: www.adamsmith.org.
- The Adam Smith Institute has advised on airport privatization and restructuring around the world. For information, visit www.adamsmithinstitute.org.
Copyright 2002: Adam Smith Institute
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