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STATUS OF AIRPORT PRIVATIZATION EFFORTS
Wednesday, June 30, 1999
House of Representatives, Subcommittee on Aviation, Committee on Transportation and Infrastructure, Washington, D.C.
The subcommittee met, pursuant to notice, at 10:03 a.m. in Room 2167, Rayburn House Office Building, Hon. John J. Duncan, Jr. [chairman of the subcommittee] presiding.
Mr. DUNCAN. We are going to go ahead and call this hearing on airport privatization to order. I want, first of all, to thank all of the witnesses for being here. I know that some have traveled a considerable distance to get here and we certainly appreciate that and appreciate the fact that you have taken time out from what I know are very busy schedules to be here with us.
A little more than three years ago on February 29, 1996, to be exact, this subcommittee held a hearing on airport privatization. At that time several foreign airports were being privatized. In fact, I think that according to the briefing memorandum, some 66 foreign airports have been privatized or sold to private interests just within the last two years. But the concept was and still is a rather novel one in the United States. In fact, very little has been done in the United States compared to what has been going on throughout the rest of the world.
After that hearing we put together legislation to establish an Airport Privatization Pilot Program. That legislation allowed five airports to be privatized, one of which was supposed to be a general aviation airport. It was ultimately incorporated into the Federal Aviation Authorization Act of 1996.
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The legislation was designed to bring the benefits of private sector management to airports in this country. In writing that legislation we were well aware that some in the aviation community were concerned about privatization. In particular, airlines and general aviation feared that private airport operators would raise their fees and divert the revenue to nonairport purposes. The legislation ultimately adopted was carefully crafted to protect the interests of airport users while still encouraging greater private sector involvement in U.S. airports.
Of course, privatization means different things to different people. The pilot program in the law permits ownership or a long-term lease of an airport. However, the private sector is involved in airports in many ways short of outright ownership. For example, at most airports private concessionaires operate many of the airport services. In fact, I think the generally accepted estimate is that 90 percent of the employment at most airports is conducted by private companies. Terminal buildings at some airports are being privately managed. There are even a few airports where private companies have been hired to run the whole operation, even though the facility is still publicly owned.
So we are seeing more and more private sector involvement in our nation's airports and I think that is probably a good thing. It can hopefully increase efficiency, improve safety, and ultimately benefit airlines, passengers and all those who use our airport system.
Today we will be hearing from a company involved in airport management, two airports that are looking to participate in the privatization pilot program and the FAA. And I appreciate the participation by all of the witnesses and the FAA.
Basically this hearing is to see where we are. Just last week the very respected syndicated columnist Robert Novak referred to airport privatization as the wave of the future. On the other hand, a very well respected aviation and transportation expert, who was one of those I think most interested in airport privatization when we worked on it three or four years ago, I understand has said that in his trips around the country he has found that there is not quite as much interest in it here in this country as there was three or four or five years ago.
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So that's what this hearing is about, to find out where we are. Is airport privatization the wave of the future or is it basically just a passing fancy?
I now would like to recognize my good friend, the very distinguished ranking member of the subcommittee, Mr. Lipinski.
Mr. LIPINSKI. Thank you, Mr. Chairman. Thank you for holding this hearing today. In 1996 this committee created a pilot program for airport privatization which allowed up to five airports in the United States to be privatized. However, as of today not a single airport has been privatized and there are only two applications for the program pending at the FAA. This is in contrast to the 66 major airports worldwide that have been sold to private interests in just the last two years.
Obviously airport privatization is not as widespread in the United States as it is throughout the rest of the world, but we have to ask the question why? Is it because of a lack of support at the local level? Is it because of labor concerns? Or is it because the 1996 Airport Privatization Pilot Program does not do enough to encourage airport privatization? Are there still major legal and financial barriers to airport privatization that are hampering efforts in the United States?
I look forward to hearing from our witnesses today. In particular, I look forward to learning what they believe is the main reason for airport privatization not becoming as popular in this country as it is throughout the rest of the world.
And, in conclusion, I want to say that the distinguished columnist Mr. Novak is from a suburb of Chicago, Joliet, Illinois. He attended the University of Illinois, where my daughter attended school, also, so he must know what he is talking about, Mr. Chairman. Thank you.
Mr. DUNCAN. Thank you, Mr. Lipinski.
Mr. Filner?
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Mr. FILNER. Thank you, Mr. Chairman. If possible, I would like to reserve my remarks to introduce one of the panelists.
Mr. DUNCAN. Sure. Mr. Holden?
Mr. HOLDEN. No statement.
Mr. DUNCAN. All right.
Well, we will introduce the first panel at this time. We have a very distinguished panel consisting of Mr. David C. Suomi, who is vice president of the British Aviation Authority USA, Incorporated; Mr. John Edward Buttarazzi, who is senior vice president of the Empire State Development Corporation; and Mr. Joseph A. Piscitell, who is president and CEO of Diversified Asset Management Group.
And certainly we are pleased to have all of the witnesses with us and Mr. Suomi, we will start with you, please.
TESTIMONY OF DAVID C. SUOMI, A.A.E., VICE PRESIDENT, BAA USA, INC.; JOHN EDWARD BUTTARAZZI, SENIOR VICE PRESIDENT, EMPIRE STATE DEVELOPMENT CORPORATION; AND JOSEPH A. PISCITELL, PRESIDENT AND CEO, DIVERSIFIED ASSET MANAGEMENT GROUP
Mr. SUOMI. Thank you, Chairman Duncan and members of the subcommittee for this opportunity to testify today regarding the status of airport privatization in the United States.
My name is Dave Suomi. I am vice president of BAA USA, a subsidiary of the London-based BAA PLC, formerly the British Airports Authority prior to its privatization in 1987.
BAA, as owner or operator of some 15 major airport facilities around the world, including London Heathrow, cares for some 175 million passengers per year and we appreciate the opportunity for us to provide our insight on the subject of this hearing.
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I am here to report that airport privatization is alive and well in almost every venue in the world, except the United States. Major airport facilities have been totally privatized in a dozen countries around the world. Many others are under way. Unfortunately, in the United States the response has been more tepid.
Why hasn't privatization reached its potential in the United States? BAA has been surprised by the lack of progress, especially when you consider the tremendous advantages that the private sector can bring to all of the stakeholders—the airlines, the communities, the employees and especially the passenger.
However, when you sit down and analyze why the industry is not taking advantage of these tremendous benefits, you identify three issues that must be addressed if we are to allow our airport to realize their full potential.
First, we, and by ''we'' I refer collectively to the private sector as the airport operator, the Congress as the author of the Pilot Program, and to the FAA as implementers of the program, we have not convinced the airlines of the direct benefits to them of private sector operation of airports.
For example, since the privatization of the U.K. airports in 1987, charges to airlines at Heathrow have been reduced by over 20 percent in real dollars, all while increasing capital investment in infrastructure by over 400 percent. This is graphically illustrated in the exhibit before you.
[The information follows:]
[insert here]
Mr. SUOMI. Airlines should be embracing the concept of privatization, if done properly, as a means of reducing costs and increasing service to them and their customers. The airlines do recognize that if the airport is not operated efficiently they, by virtue of the closed-loop financing typical in the industry, will ultimately bear the cost of that inefficiency. However, they seem to accept this inefficiency as a cost of doing business because the fear of the unknown outweighs the potential benefits of a new approach.
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Second, we, and again I refer to us collectively, have not given sufficient incentive to the local government airport owner. Many of the successful privatizations that have occurred started with a leader that was committed ideologically to keeping the government focussed on its core competencies. They believed that privatization stimulated competition and competition stimulated productivity.
However, the vast majority of our local government leaders are pragmatists. They are overwhelmed with other demands for their time and attention and they frequently see no real motivation to do what is necessary at their airports, as long as their community cannot benefit financially from those actions.
BAA knows from experience that sufficient value can be gained to the benefit of all the stakeholders. For example, in 1998, in addition to lowering charges to its airline partners at Heathrow, BAA paid the equivalent of $340 in federal corporate taxes and another $100 million in local property tax.
There are significant benefits to the community. However, if we are to overcome the current inertia, we must find a way for the focus to change from ''Where is the money going?'' to ''What are we getting for what we're paying?''
Third and finally, the employees have yet to be convinced that this fundamental change will benefit them, that airport privatization can and does result in benefits to the employee personally in terms of compensation, career opportunities, training and job satisfaction.
There is an established track record that demonstrates the positive manner that employees are dealt with during and after managed competitions. We must do better in getting the word out. We must let both the staff and the union leadership see that the private sector is not a threat but rather, a way to become empowered, recognized and properly rewarded.
There is no issue with the existing staff. It is the frustrating and restrictive climate of government employment that prevents them from achieving exemplary results.
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In closing, let me say that we share your frustration over the apparent slow pace of development of this approach to improving our airports, especially when there is such a demonstrated track record of success elsewhere.
There has been significant debate in removing the obstacles and having forums such as this for debate. People's perceptions are changing but we cannot for a moment think that all that is needed now is time. We must continue to work to remove these final hurdles to allow our airports to take the next step to achieve their full potential.
Mr. Chairman, I thank you and the committee for the time and interest.
Mr. DUNCAN. Mr. Suomi, thank you very much.
Mr. Buttarazzi.
Mr. BUTTARAZZI. Thank you, Mr. Chairman. Chairman Duncan, Mr. Lipinski and members of the subcommittee, my name is John Buttarazzi, senior vice president with the Empire State Development Corporation, New York State's primary economic development agency.
It is my pleasure to testify about the Airport Privatization Pilot Program and New York State's experience with respect to Stewart International Airport, the first U.S. commercial service airport to be privatized under the program.
Before starting, I want to take this opportunity on behalf of Governor Pataki to express our deep appreciation to this committee, particularly Chairman Duncan for his bipartisan leadership in making the program a reality. Today I hope to demonstrate that the benefits of your vision, specifically improving the nation's air infrastructure, generating economic growth and creating new jobs, will be realized at Stewart and were well worth your efforts.
We believe the privatization of Stewart is one of the most exciting infrastructure improvement initiatives in the United States. We have been overwhelmed by the tremendous support given to the project by the local community, including numerous civic organizations, elected officials and individual citizens.
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Indeed, the excitement surrounding Stewart has been so strong that other New York State communities have taken a fresh look at airport privatization and tomorrow we will commence soliciting bids to privatize the Niagara Falls International Airport. This is the request for proposals for that airport. There is an ad in today's Wall Street Journal to that effect.
First, I would like to provide some background on Stewart Airport, which is now operated by the New York State Department of Transportation. Stewart Airport is in New York's mid-Hudson Valley about 60 miles north of New York City and 90 miles south of the state capital in Albany. The airport is adjacent to two major interstate highways and has excellent access to commuter and freight lines. In addition, the airport is a small hub regional airport with scheduled and charter passenger service provided by a number of major airlines and several air cargo carriers also operate at the airport. The airport handles roughly 800,000 passengers and 75,000 cargo tons annually.
Despite the benefits of its location, including a catchment area of about 2 million persons, as a state-run facility the airport has never fulfilled its potential. In addition to competing for limited state resources and being vulnerable to shifting governmental priorities, traditional bureaucratic inefficiencies and other governmental restrictions have prevented the airport from responding quickly to changing market conditions. The inability to conduct consistent financial planning and to quickly seize upon market opportunities when they arise have resulted in diminished capital investment and a lack of vastly enhanced services for air carriers and the traveling public.
Upon taking office in 1995, these inefficiencies were readily apparent to Governor Pataki and he expressed his strong desire to relinquish state control of the airport and build upon the successful experience he had learned about privately owned and operated airports around the globe, including those operated by BAA.
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The governor soon realized that a meaningful transfer of Stewart to a private operator was effectively blocked by a number of federal restrictions. Particularly onerous were those requiring privatized airports to repay federal grants and which prevented an airport operator from taking revenue off the airport and realizing the fruits of running a successful facility. The governor lobbied for removing these restrictions and while he supported even broader reforms, was gratified that the enactment of the pilot program in late '96 would allow Stewart's privatization to go forward.
Two and a half years later, we are now in the final stages of the privatization process and hope to complete the transfer in the very near future. Certainly this time frame was more than we ever anticipated when we began this process, but as the first airport to be privatized in the United States and no roadmaps to guide us, we have been breaking new ground every day and confronting issues with no precedent.
Moreover, the state has regularly sought and incorporated public input, including participating in regular monthly public meetings held by the airport's local advisory commission. I am pleased to declare, however, that no delays have been attributable to the FAA. In fact, the agency has been extraordinarily thorough, professional and helpful in moving this project along.
Let me outline the process we followed. First, we had to write a request for proposals. That is this document right here. The RFP was issued in June '97 and proposals were received from five qualified airport operators in October of that year. Also in October the state submitted to the FAA its preliminary application to privatize Stewart, and that application was approved on month later.
In April 1998, after a lengthy and diligent review of the proposal, the state selected National Express Group of Great Britain as its preferred bidder. National Express is a well established British multi-modal transportation company with 1998 gross sales of $2.1 billion. They successfully own and operate two airports in England that were bought from the private sector. The airports—Bournemouth International Airport and East Midlands International Airport—have experienced substantial increases in services, revenues and employment under National Express. Moreover, East Midlands, which is England's fourth largest regional airport, is similar in size and regional make-up as Stewart.
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At this I must caution that until our deal with National Express is finalized, the transaction is still considered open. However, I can disclose that National Express proposed a 99-year lease with an initial $35 million payment and 5 percent of the gross airport income beginning in the tenth year of the lease.
Concurrent with negotiating the lease with National Express, the state submitted a final application to the FAA earlier this year, which was accepted for publication on April 8. This started a 60-day comment period, which was extended by three weeks at the request of the local congressional delegation. The comment period ended earlier this week on June 28.
In our application, the state is seeking exemptions from grant repayment requirements and restrictions on National Express related to their use of profits. Consistent with federal aviation law, the state is not seeking an exemption related to the state's use of lease proceeds because those monies will reimburse the state for previous capital investments in the local air transportation system and will be spent on airport-related projects. In addition, the application meets all congressionally mandated requirements, including ensuring fair airport access, maintaining safety and security, adhering to collective bargaining agreements and mitigating any adverse environmental and noise impacts.
More importantly, the state recognized that one of Congress's top priorities in enacting the program was to enhance capital investments in our nation's air infrastructure. Consequently, one of the more innovative aspects of the Stewart transaction is the governor's intention to spend all lease proceeds on airport-related projects across the state. Specifically, the governor has proposed spending more than $10 million on projects related to Stewart and to establish a $21 million fund for reinvestment in airports across New York State. This $31 million airport investment money would be not available in the absence of Stewart's privatization and is a direct dividend of the pilot program.
Before closing, I would like to offer some recommendations to improve the program. First and foremost, I believe that Congress should permit the sale of airports to a private entity. Negotiating a lease for the airport has proven to be the most time-consuming aspect of Stewart's privatization. A number of complicated lessor-lessee issues must be negotiated that otherwise would not be present in an ''as is, where is'' sale. Moreover, given there is little impact on the decision-making process of a private airport owner versus a private operator under a 99-year lease, complications arising from prohibiting a sale do not appear to be worth the cost.
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Second, while we recognize the important role played by air carriers at a successful airport and strongly believe they must be treated fairly if an airport is privatized, the air carrier certification's requirement on the use of proceeds is a difficult obstacle to overcome. Specifically, to the extent air carriers remain adamantly opposed to any form of revenue diversion, even where the ''off-airport'' spending is for other airports within a state, their approval will be elusive. This was our experience at Stewart, although as noted above, our previous investments at the airport and future investment plans did not necessitate airline approval.
Finally, Congress should consider establishing a statutory deadline for the FAA to act upon a privatization application once the public comment period is closed. Although we have every reason to believe that FAA will act expeditiously on Stewart, the lack of a firm timeframe places a substantial burden on planning an orderly transition at the airport once the application is approved.
In summary, Congress made a sound decision in enacting the privatization pilot program. By privatizing Stewart, New York will be able to enhance the performance and efficiency of the airport by improving the quality of services for air carriers and other airport customers, enhance the surrounding business environment and create new jobs, improve competition in the New York air services market and provide air travelers with greater choices and more convenience, and invest 31 million new dollars in airport infrastructure.
Again Chairman Duncan, I thank you for inviting me to address the committee this morning. I would be more than happy to answer any questions.
Mr. DUNCAN. Thank you very much, Mr. Buttarazzi.
I believe Congressman Filner wanted to introduce our next witness.
Mr. FILNER. I thank the chairman for the chance to say a few words in support of the on-going efforts to revitalize Brown Field, which is in my congressional district in San Diego, California.
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Brown Field is now a small general aviation airport. It sits right on the U.S.-Mexico border and many in San Diego hope to convert this into a world-class cargo airport.
Officials of the City of San Diego, on whose council I served for many years, quickly realized that such a transformation of Brown Field could not be completed through the conventional city-sponsored channels for many reasons. It was beyond the city's ability to address the risk; the financial obligations were simply unobtainable in the city's budget; and the city, frankly, lacked the technical, financial and marketing expertise necessary to test the concept of a new cargo airport.
Private capital and the people and organizations with the required expertise and ability to take the necessary risks seemed better suited to tackle this ambitious venture. These factors led to the creation of the kind of public/private partnership that this committee and this Congress has supported. The Brown Field Aviation Park is now leading the charge to create the proposed San Diego Air Commerce Center at Brown Field.
Mr. Chairman, private enterprise is uniquely able and willing to offer this city project what the city itself could not do. This ensures not only that the project will, in fact, move forward but increases its chances for success. And when the partnership of public and private sectors at Brown Field completes the project, it will be a boon not only, of course, to my congressional district but to the entire regional economy. New jobs, increase of tax base, stimulation of the economy are only the things that will result from such a partnership.
The next panelist, Mr. Joe Piscitell, chairman and CEO of the Diversified Asset Management Group, will speak further of how joint efforts with the City of San Diego make this project uniquely capable of identifying opportunities, managing risk, marketing the project to tenants, and applying the necessary financial resources to ultimately make this airfield of dreams a reality.
Mr. Chairman, I am convinced that this public-private partnership will transform Brown Field into an engine for real job and economic growth. This partnership can turn our sleepy little Brown Field into the little airport that could by opening the airways to international air trade for my community and for all of our state.
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I thank you, Mr. Chairman. I look forward to the testimony of Mr. Piscitell.
Mr. DUNCAN. No conservative Republican could have made a better statement than that, Mr. Filner.
Mr. FILNER. Reserving the right to object.
Mr. DUNCAN. Mr. Piscitell?
Mr. PISCITELL. Chairman Duncan and members of the subcommittee, good morning. Joe Piscitell, president and CEO of Diversified Asset Management Group appearing here today to discuss airport privatization.
I would like to thank Representative Filner for his kind remarks today. Our project, as you know, is being done in his district.
I am accompanied here today by Michael Lexton, who is managing director of public finance at Merrill Lynch, and also Sandy Murdock, who is our counsel here in Washington, in case there are any questions later that they can assist with.
I previously submitted a longer statement for the record and would like in my testimony to focus on a few points that may be of interest to the subcommittee.
Thank you for inviting DAMG to this hearing and importantly, thank you for proposing and enacting the pilot program. This experiment provides opportunity to test whether private capital can be effectively used to develop airports in the U.S. DAMG knows that the public-private partnerships have worked successfully overseas on numerous airport projects. While we recognize that the foreign experience is not directly relevant to our domestic airport system, we relish the opportunity to demonstrate that the concept can work.
DAMG is one of two private entities actively using its own capital to develop new airport infrastructure in the U.S. under the pilot program. Today we will limit our comments to the following observations that respond most directly to your inquiry. One, who is DAMG and why we are risking our money in airport projects around the world. Two, why the San Diego airport project at Brown Field demonstrates that the pilot project is good public policy. Three, our experience with the specific application of the statute to our project and listing some of the lessons learned. And finally, why our appetite for such projects in the United States is growing.
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DAMG is an investor-financier of infrastructure projects throughout the world. As its founder, my years of experience in finance and real estate, and particularly aviation-related projects, suggested there might be airport real estate projects to which innovative finance might contribute.
Specifically, it appeared that private capital is uniquely capable of identifying opportunities, managing risks, marketing the development of the opportunity to likely tenants, managing the project, finding and using funds and, most importantly, making a vision into a reality.
DAMG was formed to provide a funding vehicle for such aviation infrastructure projects here and abroad. The company, which is only four years old, has a portfolio of existing projects which involve over $1.2 billion in air cargo projects here and overseas.
Government does many things well and it is abundantly clear that the U.S. airport system exists today because of the wisdom and fiscal competence of many city, county and authority managers.
The U.S. airport business has a history of careful construction of airport capacity, primarily designed to meet known, historical passenger demand. It is self-evident that American airport executives are most competent in designing, building land leasing airport facilities and that most of the American airport projects have involved extrapolations of past trend lines.
The horizon of aviation projects with such reliable forecasts is full, and traditional airport project management will continue to make such contributions to the U.S. system. Increasingly, however, there are aviation needs that do not meet this historical paradigm. As we move toward our hundredth year of aviation infrastructure, the range of airport projects will now include more risk.k
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One area of phenomenal growth within the aviation industry is the air cargo segment. FAA, Boeing, Airbus and most respected aviation economists all project rapid increases in airfreight. The special needs of this industry and the associated e-commerce involve new risks that have not been a primary aspect of airport development. This arena may well provide a good long-term prospect for private capital and this is a sector on which we have focussed.
In addition, the American traveling public and the Congress lament the lack of competition in the passenger airline industry. Many critics claim that the existing infrastructure stifles competition. These experts assert that if there were more airside and landside gates, competitors could move more readily into markets. Airport authorities are not known for, nor may they be well suited for, building spec facilities for new competition—terminals, garages, hotels and other special facilities.
The problem may be that these new entrants may not be long-term tenants. However, private sector entrepreneurs may be willing to take on such risks. They may have sufficient confidence in the demand of the city or they may have some other methods of compensating for such problems through additional services or new aircraft.
A third example of opportunity for risk-taking involves communities with plans for future growth. New industry, new tourist attractions and new housing require air service to meet those demands. However, the FAA's funding priorities make it difficult to obtain discretionary dollars for such undefined and unrealized demands. The same visionaries who have built the local businesses and homes may have the capacity to build a privatized airport.
All three of these examples demonstrate how traditional airport funding may be strained to meet the new needs that the future may present. Private capital, people and organizations with skill and capacity to take risks may be better suited for these ventures.
Let me summarize briefly our experience with San Diego's Brown Field. Brown Field is located near the U.S.-Mexico border and has been operated by the City of San Diego for a number of years. Airport management saw an opportunity to develop a portion of the land as an industrial park as a source of revenue to help run the airport. They issued an RFP to see if someone would be willing to take on such an enterprise.
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Long story short, a group of private entrepreneurs have proposed to transform a break-even airport into a major engine of economic development for the city. By investing private capital, we can move quickly and establish a major piece of infrastructure to capture existing trade that today passes by the existing runway on a journey embarking at LAX or some other congested facility.
Even more significantly, this venture will risk our investors' funds so that Brown Field will generate new commerce around this facility and then serve as the port for moving these new products to the world markets.
Under this new approach we can share the fruits of the public-private enterprise with the City of San Diego. Without the exemption of the pilot program, new landing fees, ground rents, et cetera, generated by the San Diego Air Commerce Center could only be spent on airport-related projects. The city, through your statutory amendment, can utilize these otherwise uncaptured funds for police, fire, schools, libraries.
Our experience with the process and the people associated with the pilot program has been positive. The statute defines nine terms which the privatization project must meet and we have found none of these to be onerous. And upon reflection, all nine reflect business policies as practices that we probably would have followed in any event.
From a practical standpoint, the FAA staff here in Washington has been extraordinarily helpful. They have found ways to make things work. And the FAA Western-Pacific organization has been supportive throughout the challenging and complex associated planning and environmental process.
Similarly, the professionals who manage the City of San Diego have grasped the benefits of SANDACC and relayed them to the community and have helped move the project forward.
As an aside, it should be noted that from our experience elsewhere in the United States, airport managers have been taught for years that revenue diversion is an illegal act and therefore react viscerally to that.
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Prior to reviewing the statutory conditions of the Privatization Act, let me discuss some of our lessons learned. First and foremost, it is feasible for private developers to assist in the development of much-needed aviation facilities. Secondly, private developers can reduce the amount of time required to complete such projects. And the secondary and tertiary benefits of privatization far outweigh the initial hurdles outlined in a plan.
In addition to the positives, there is an opportunity to fine-tune the system. One, the joint sponsorship of the developer and the city must be recognized during the planning process of the program. And secondly, the front-end capital requirements of a developer like us should be reimbursable within a revenue bonding program.
Now let me review briefly the statutory conditions of the legislation. I see I have a red light so I will try to move quickly.
First, the air carriers and GA fee approval requirements would have been part of our business plan without regard to the statute.
Second, the public use of the facility is how we make the business work; reasonable terms and conditions are required to be competitive; unjustly discriminatory practices just do not work.
Our bankers and consultants see no likelihood that our venture at SANDACC will fail, but if a massive, unanticipated disaster should occur, we have provided a fail-safe mechanism to ensure the airport's viability thereafter. Our substantial investment in Brown Field supports that.
Fifth, Brown Field currently has no FAA airport certificate and we intend to upgrade its facilities to meet the requirements of Part 139. Safety and security will be taken to a higher level.
Sixth, Brown Field is ideally located far from the urban development, but mindful of our civic, public and statutory duties, incompatible use will not be allowed to encroach on this facility. The city and we have devoted considerable efforts in the planning to achieve this goal.
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Seventh, no agreement with airport employees will be abrogated.
We are comfortable but not content with our compliance with the statute. We are constantly seeking means of improving. We are optimistic that Brown Field will provide proof positive about your pilot program. By that we do not mean to say that privatization is a panacea for every airport. However, we do believe that it can work and that in certain circumstances private initiative can do more than the public.
The opportunities for such ventures are increasing in the overseas markets. Domestically the pace is not as good. We again commend the chairman for holding these hearings. The mere fact that Congress is inquiring into the pilot program's health should further legitimize this concept.
Truly innovative concepts challenge traditional thinking and it takes time until the merits of such change become apparent. We ask for your patience and we appreciate your support.
This concludes my remarks and I would like to thank you again for the opportunity to provide my thoughts concerning this most important program.
Mr. DUNCAN. Mr. Piscitell, thank you very much.
Mr. Suomi, let me begin the questioning by referring to a statement you made at the opening of your testimony. You said you were here to report that airport privatization is alive and well and you heard me mention in my opening statement that 66 major airports around the world have been privatized just in the last two years and that columnist Robert Novak said last week it is the wave of the future. And yet there is less being done on it here in the United States than most places, especially most industrialized nations around the world.
Why is that? Is it as I quoted or mentioned, that one high-ranking former transportation official said that there is just not as much interest around the country for this as he once thought? Is there interest? Is it the wave of the future? Go into a little more detail if you could about why you think there has been less movement in this direction here than in many other countries around the world.
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Mr. SUOMI. Certainly, and thank you very much for the opportunity to speak to that issue.
At airports around the world, the airports are perceived a little bit differently than they are in the United States in that those airports are—I am speaking for the most part now of the larger facilities—those airports are increasingly being viewed as the commercial facilities that should be operated as a business, should be operated without subsidy, and are expected to make a profit for their stakeholders, as well as contributing back to the local government or the national government, as well, like any commercial enterprise would.
In the United States, the airports are perceived to be a little bit more protected, if you will, and I believe it goes back to probably 40 or 50 years when the industry was much younger and in need of nurturing, when certain incentives were set up to help the industry but, in essence, have remained and are now contributing to what is a mature industry.
Those incentives are still in place, whether it be airport improvement program grants or tax-exempt financing or sales tax exemptions or property tax exemptions. I am not here to pass judgment on whether or not that is good or bad as much as to explain that those are all complications that are very difficult to address when it comes time to trying to have a privatization of an airport with the triggers that are included in the legislation associated with that funding.
Mr. DUNCAN. I am sure that in 1987 or 1986, just before this was done, in Great Britain, when seven major airports were privatized, that there were many concerns by airport employees and the airlines and so forth.
In the 12 years or so of experience that you have had, is there any movement at all that you know of to go back in the other direction toward unprivatized, going back toward public ownership? And would you explain in a simpler way exactly what this chart is? Is the thin line the cost to the airlines and you said the cost to the airlines has gone down 20 percent or something since privatization and yet your capital investments have gone up? Is that correct?
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Mr. SUOMI. That is correct.
Mr. DUNCAN. So there are really two questions there.
Mr. SUOMI. Yes, that is exactly what that is showing.
To answer your first question, if there is a community or a country outside the United States that is trying to reverse an airport privatization that they have had in the past, I am unaware of it.
What this chart is illustrating is that it is possible in a privatized environment to add enough value to continue to grow and develop the infrastructure on the airport rather significantly and still address the legitimate concerns of the airlines in keeping prices down.
The thin line shows the first year after airport privatization of the airport at Heathrow, where the charge per passenger was just under 5 pounds 60. Over the years since then, through regulation with the oversight of the Mergers and Monopolies Commission, the charges at Heathrow have gone down on an annual basis.
It is reviewed every five years. The first five years after privatization the charges were reduced 1 percent for each year after inflation was taken into account. For the next five years the charges went down 8 percent, 8 percent, 4 percent, 4 percent and 1 percent, again after inflation. And with the five-year period we are in right now, the Mergers and Monopolies Commission has dictated that the charges will go down 3 percent per year for each of the five years.
Despite that rather challenging environment for the airport, we have been able to add enough value through nonairline fees at the airport to still increase the annual investment from what was about $75 million the first year after privatization to what is about $460 million annually currently.
Mr. DUNCAN. Well, thank you.
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My time is already up and I have several more questions but Mr. Buttarazzi, let me just ask you very quickly, tell us a little more about your airport. I have been told it is a small hub for USAir. Are there other airlines? And how many passengers do you have each year.
Then secondly, I understand that you are very close to completing your application, a month or so away, and I am wondering, have you had any indication from the FAA as to about how long it might take them to give you the final approval? Or how long do you think they would need for that?
Mr. BUTTARAZZI. I would be happy to. The airport has approximately 800,000 passengers and handles approximately 75,000 cargo tons on an annual basis. It has, I believe, the longest runway on the East Coast. It is nearly 12,000 feet long. It can handle anything that flies in the world, including the Space Shuttle.
It has always been viewed as a tremendous facility physically but one that has underperformed on a commercial basis. It has major carriers. It has direct flights to points on the East Coast and points to the ranking member's home town, to Chicago.
So it is quite a good facility. It services—as I said, there are 2 million potential passengers within an hour of the airport but if you stretch it just another half hour, say an hour and a half, there are 9 million passengers. It really starts to go into the metro New York region. In fact, that is what leads us to believe that with a more entrepreneur approach, it will probably bring some competition to air fares into the New York City regional market.
As for the FAA and their approval process, I obviously cannot speak for the FAA but I go back to my earlier remarks that they have been nothing but professional. The comment period closed this past Monday. Their review is going to in some manner be a function of the number of comments that were filed and the need to address those comments. But I am confident they will act expeditiously. They have worked very closely with us.
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I know your time has run out but in addressing the question why haven't more U.S. airports taken advantage of the program, I think you are going to see more and more now step into the program. The reason I say that is frankly, we were the guinea pigs. It has been a long and sometimes arduous process but it has been a rewarding process. We have had to learn a lot about it. Probably the biggest mistake we made was not copyrighting the RFP because we have had other airports from around the country ask for copies of it.
So there is a lot of interest, trying to get a feel for how the program works, what the FAA approval process is, what is going to go into the lease, which is a very complex document. I think a lot of folks are waiting to see the results of that and then they will make a judgment and assessment of whether it is worth going into and I think they will find it is worth entering the program.
Mr. DUNCAN. So you think there is a lot of interest around the country?
Mr. BUTTARAZZI. There is interest. I think right now a lot of it is kicking the tires interest, but speaking for New York State and Governor Pataki, we are very excited by the program to the point that, as I mentioned, we are issuing the RFP for the Niagara Airport tomorrow and we are going to take advantage of the program.
Mr. DUNCAN. Thank you very much.
Mr. Lipinski?
Mr. Sandlin?
Mr. SANDLIN. I do not have any questions, Mr. Chairman. Thank you.
Mr. DUNCAN. All right, Mr. Traficant?
Mr. DeFazio?
Mr. DEFAZIO. Thank you, Mr. Chairman.
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To Mr. Suomi, the transactions in Great Britain, I am curious about some details. There was a public share offering worth $2.5 billion. Now how does that relate to your operation of the airport? It says that the airports were in public ownership. There was some sort of a public share offering. Money was garnered for the federal treasury by somehow offering these public shares. I do not quite understand how that relates to your operation of the airport.
Mr. SUOMI. There was a stock flotation for what was the British Airports Authority and prior to that, a department of the British government. The Airport Authority came about in 1966. In 1987 there was a stock flotation for the value that you just indicated and the airport was spun off with its existing management. It was a widely distributed floatation, the proceeds of which flowed into the treasury so that BAA is now a free-standing, independent, privately operated, publicly traded company on the London Stock Exchange. Our existing market capitalization is around $12 billion.
Mr. DEFAZIO. So there was a return to the taxpayers of Great Britain for their past investment in these facilities and by the initial public offering. That money went to the national treasury.
Mr. SUOMI. That is correct.
Mr. DEFAZIO. Okay. Is Heathrow, Gatwick, which I guess you are operating those two?
Mr. SUOMI. Yes, we own the three major London airports—Heathrow, Gatwick and Stanstead.
Mr. DEFAZIO. Do you now receive grants from the national government for improvements or any other activities at those airports?
Mr. SUOMI. No, we do not.
Mr. DEFAZIO. So then I guess, Mr. Chairman, what I would like to raise are the concerns I raised when we first visited this issue a couple of years ago. I really do not object to these experiments, as long as we follow a tried and true model. That is that the taxpayers of the nation or the county or the city or the state involved get reimbursements for their past investment, as happens in Great Britain, and there is no longer eligibility for federal funding. We do not have enough AIP funds to go around and I would be happy to cut some airports out of that cash flow.
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So if we were to modify the program to disqualify them from further AIP grants, exert central control over what fees they charge, as has been done in Great Britain, and get an initial public offering or somehow otherwise reimburse the taxpayers for their past investment, I think this will be an interesting experiment.
But the way we have structured the experiment is they still get grants, subsidies from the federal government, they pay nothing for past investment or nothing is required, and they are not limited in terms of what they can charge.
So I would suggest that if we want to follow a very successful model, we should follow the British model, which would mean a dramatic overhaul of the pilot program. Thank you for the time, Mr. Chairman.
Mr. DUNCAN. Thank you very much.
Vice Chairman Sweeney.
Mr. SWEENEY. Thank you, Mr. Chairman. I apologize for being late and I would ask unanimous consent to I submit a statement for the record.
Mr. DUNCAN. Your statement will be included in the record.
Mr. SWEENEY. I have only a couple of questions and I will start by asking Mr. Buttarazzi, who I will point out, as you introduced him, is a representative of New York State but not just New York State but its economic development wing. I think that speaks significantly about the commitment and the effect of Governor Pataki and New York State toward aviation issues and trying to do what we have talked about extensively this year, and that is increasing competition so we can increase access to service.
And if I could, I would like to ask John Buttarazzi to talk a little bit about two things—the effect of privatization on those two competition issues and secondly, the decision-making process. Having been a part of it, I would also like to discuss on the record the decision to lease rather than sell the airport outright.
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Mr. BUTTARAZZI. Thank you. We think it is going to have a very positive effect on competition. Obviously with a private company coming in that will be compensated by the number of people they get through that terminal, it is going to be in their interest to drive up passenger traffic. To drive up passenger traffic they are going to have to make the airport attractive to the air carriers.
I should mention that National Express Group, which has been determined as the preferred bidder, has agreed to freeze the rates and charges at the airport until a 5 percent real reduction is achieved in those rates and charges.
Stewart Airport is easily accessible from New York City. It is accessible from Westchester County, as well as the northern New Jersey counties. As an alternative airport for the traveling public, it should pressure on flights at LaGuardia, Kennedy and JFK in terms of fare competition. It certainly is going to help me. I live in northern Westchester and I like using that airport.
As far as the decision-making process concerning lease versus sale, the governor, I believe, testified when the legislation was being considered here in Congress. We stated a preference for a sale. We did look at the British model, where airports were sold fee simple. As David mentioned, the three airports they own in London they own fee simple. The airports National Express owns they own fee simple.
With that, we would have preferred to sell the airport. That was the governor's first inclination. Congress saw otherwise, that they would prefer to have a long-term lease of the airport, so we are simply following the federal law. But that said, it is a 99-year lease, which is virtually tantamount to a sale. The only difficulty we encounter, though, is you end up having to draft a lease to govern for 99 years and that is a pretty substantial prenuptial agreement, trying to anticipate everything that may happen.
So in 99 years time I do not see the real substantive difference between having a lease versus sale and I would urge Congress to consider allowing for the sale of commercial airports. Thank you.
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Mr. SWEENEY. Let me ask one last question of Mr. Suomi. The information that you provided is very helpful in determining what you have been able to reinvest into the airports and the overall aviation infrastructure.
What kind of relevant data do you have, if any, on effect beyond just additional services to consumers, but the basic services—access to greater options in terms of travel and cost? Has there been that kind of information developed and could you share some of that with us if there is?
In other words, have the privatization initiatives that you have undertaken had a real effect on the pocketbook in a real practice sense to consumers?
Mr. SUOMI. Yes, and I guess I would answer that in two ways. First of all, because of the pressure that is put on us through regulation that dictates that the aeronautic revenue must decrease, that forces us to take a business approach and a customer service approach to all other aspects of the business. That has resulted in dramatic increases in nonairline revenues at the airports we operate.
For instance, at Allegheny County Airport, the new terminal building at Pittsburgh, prior to BAA's development of that in 1992, the gross concession revenues were $22 million a year. Now, some seven years later, those gross concession revenues are fourfold, about $85 or 88 million this year on roughly the same passenger traffic.
That is, people that are voting with their billfolds, if you will. And that is even more revealing when you see that BAA's commercial approach dictates true street pricing at the airport. So we had that type of gross revenue increase while we lowered all of the prices and while we put in many, many new tenants. There are now more retail locations at the Air Mall in Pittsburgh than there are gates, for example, with a number of shops that are now in airports for the first time because of Pittsburgh. That is one example of how it benefits the consumer directly.
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The second example I would have to provide separately but there are independent third-party analyses of airline costs at international facilities around the world. Travers-Morgan, a third-party consultant that does this, publishes it annually and since the airport was privatized, or I should say since they started doing it in 1990, BAA has dropped in that ranking, becoming more cost-effective, more efficient relative to the other airports.
Mr. SWEENEY. I thank you and I yield back the balance of my time.
Mr. DUNCAN. Thank you very much, Mr. Sweeney.
Ms. Millender-McDonald.
Ms. MILLENDER-MCDONALD. Thank you so much, Mr. Chairman and ranking member. I am pleased to sit and hear some of the comments that have been made and I am sorry I was late, too, but I was in another committee hearing.
It is important to listen to and to get information back to us on how the private and public sectors are working to benefit the traveling public. We know that a lot of the airport infrastructure is old and we do need to inject that new capital that is coming in from the private sector to make that happen.
You might have answered this, it might have been raised, but in terms of the San Diego acquisition or to engage in the pilot program, what are those remaining details that you are still trying to hash out with FAA? Can you speak to that or are you at this juncture not—I am reading from some of the reports that I have that there are some remaining details that the FAA needs to discuss before approving the application for the San Diego pilot program.
Mr. PISCITELL. Yes, we are working with the FAA on two fronts—the Western Region obviously to work through the planning, air space issues, landside, airside access issues. So we are working through that and have had some environmental issues that we have worked out between the FAA and some of the other constituent agencies.
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In Washington we have made our preliminary application to the FAA for the privatization participation and we will be advancing additional information to them as the process in San Diego continues.
We expect that the hurdles and the challenges that we have with the environmental and the air space issues will be finalized sometime late July and that will allow us then to give a schedule to FAA here in Washington to advance the pilot privatization application.
Ms. MILLENDER-MCDONALD. What about the public comment period? Has that begun?
Mr. PISCITELL. No.
Ms. MILLENDER-MCDONALD. So when do we expect that to start, if any, and when do we expect that to be finalized?
Mr. PISCITELL. As soon as we finish all the documentation with the FAA in the Western Region, we will update our application with FAA here in Washington. Again we anticipate that to be in July-August of this year and then that public comment period will start after that when we are published in the Federal Register, I presume.
Ms. MILLENDER-MCDONALD. I would appreciate a report from the public comment period on what the public said in terms of San Diego and California because we are interested in knowing what those comments are.
Mr. PISCITELL. Okay.
Ms. MILLENDER-MCDONALD. And I thank you, Mr. Chairman.
Mr. DUNCAN. Thank you very much.
Mr. Metcalf?
Ms. Norton?
Mr. Pease?
Mr. PEASE. Thank you, Mr. Chairman.
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Mr. Suomi, I represent a district that does not include but abuts the Indianapolis International Airport, so I am very sensitive to the work that you are doing there. I talk to my colleague Congressman Burton, in whose district the airport is located--he has all the infrastructure and I have all the noise--so I am very sensitive to the way the airport is operated.
However, I have to tell you, being very sensitive, I am very much impressed with the work that BAA is doing in Indianapolis. I think it is a tremendously well managed facility. It has gone out of its way to deal with the various publics that airports have to deal with, including all those neighborhoods in my district that are concerned about noise from the runways.
Having said that, I wonder why it is that Indianapolis seems to be a place where the airlines have embraced your efforts but in other airports they seem to have not done so. Are you doing something different in Indianapolis that causes the perception to be different or is it just because you have better staff there?
Mr. SUOMI. First, I do want to remark for the record that we have excellent staff at Indianapolis and thank you for that opportunity.
The airlines at Indianapolis operate, as is the case at many airports, by virtue of a residual agreement, which means that they ultimately underwrite the cost of any inefficiency and derive the benefit of any increase in efficiencies. We have been fortunate in Indianapolis to be able to succeed in implementing the types of financial improvements that we expected to, that we were committed to, and the airlines are enjoying the benefit of that.
Now you could say the same thing at any other airport that comes in and says that they are going to do this and the one thing that has probably put the airlines solidly behind Indianapolis from the very beginning—now it is based on performance but from the very beginning—was that BAA actually made a commitment to those financial improvements in reduced charges to the airlines and backed it up with a performance bond if we were not successful.
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So that is what initially committed them and now it is the on-going performance that is keeping them happy.
Mr. PEASE. If we were, as I hope we will, going to address ways to improve the federal statute that governs what can and cannot be done in privatization of airports either ownership or operation or both, what suggestions would you make based on your experiences?
Mr. SUOMI. Referring specifically to the Pilot Program? I think there would probably be two or three suggestions that we would make. First, I think that the original intent of the Pilot Program may have been a little bit too narrowly focussed. It seemed to be driven almost exclusively by a desire for private sector investment at the airport to the extent that it did not recognize a lot of the other benefits that the private sector can bring to the airport in terms of efficiency and customer service and revenue enhancement.
The other comment, and it goes back to one of the first points I made earlier, is the relationship with the airlines. The airlines fear the unknown and there needs to be a way to modify the program where we can convince them that their legitimate interests will be protected without them having an inordinate level of control over what is the desire of the local airport owner. We need to find a way to do both.
With the existing Pilot Program, the protection to the airlines is quite extreme, to the extent that you have to have 65 percent of the activity and 65 percent of the number of carriers to approve a decision to move forward and privatize the airport.
We do not think that that necessarily reflected the proper balance of interest in what should be a good faith negotiation on that decision. But having said that, that is the way the law is and we will work with it. But it is causing some decisions, as is evidenced by some of the other testimony you have heard today, to have the airlines be very fearful of what it is that they are approving.
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The local airport owner does not have an effective incentive to privatize with the control that is in there now.
Mr. PEASE. Thank you very much.
Thank you, Mr. Chairman.
Mr. DUNCAN. That was a very good question, Mr. Pease, and that is ultimately our goal if we can get some of these started, to see how they are going, but also to look at ways that we can improve the statutes involved.
Mr. Filner.
Mr. FILNER. I thank the chairman.
I have some brief questions but to follow up on Ms. Millender-McDonald's question to the San Diego issue about public comment, I just wanted to let the gentlelady know that I think part of the success so far of community support in San Diego for this effort is the outreach that has been done in advance of these formal requirements in terms of all the community interests that would be involved have been contacted, as I understand it, very early, issues from diversity of the workforce to environmental issues to noise, et cetera, and the community is involved in these issues through the whole process from the beginning.
So I think it accounts for my strong support for it because the community has been involved from the beginning and I think they are to be commended for that, rather than wait for the formal period and all the stuff to come down later.
Mr. Piscitell, you mentioned as you quickly went over some issues the failsafe mechanism in case something happened to the private entity. I know there is a lot of skepticism toward privatization. What if it fails? What if something happens to the private company? Can you just expand on that failsafe mechanism a little?
Mr. PISCITELL. Well, one of the issues that the pilot program speaks to is that the airport or an airport that is privatized, in the event that the private developer or the entity that controls the airport under the program fails, that the airport continues to operate.
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We, along with our financial advisers and the city's financial advisers, have worked through very rigorous negotiations in terms of what would happen to the airport in that unlikely scenario that the project melted down. The controls that were put in there or the protections that were put in there, for example, would be that the airport would revert to the control of the city, the city would not have on-going obligations to pay for capital improvements that we incurred during the start-up process. We have certain milestones in the development that if we do not accomplish certain things that it reverts back to the city and that they have no on-going obligation to pay for any of the obligations that we have taken on and they have no guarantee of any debt. They have no guarantee of any of our obligations.
So the city has been protected and in the event that our San Diego Air Commerce Center does not take off, they will receive an airport fully complemented with new runways, infrastructure, taxiways, with no further obligation to them. And that has been a very sensitive issue.
One of the things that attracts investors, if I just can parenthetically add, we are primarily an investor in airport infrastructure. Any change to the pilot program really has to take into consideration how companies like ours would continue to invest in these types of projects because focussing on what types of returns we need, what types of investors we can attract to invest in infrastructure, it is important that these considerations be taken into any program because we are not an operator, as our friend from BAA is, so we are looking at providing infrastructure in a different way than perhaps he is.
So our returns and our capital, we need to be able to achieve that, and any change to the program—and we believe it works right now—any change to the program should address that.
Mr. FILNER. Thank you and I thank the chairman for holding this hearing, giving us an update on these efforts.
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Mr. DUNCAN. Well, thank you very much, Mr. Filner.
Mr. Lipinski.
Ms. MILLENDER-MCDONALD. Mr. Chairman, before the ranking member speaks, I would just like to thank Mr. Filner for the update that he has just given me on the public involvement there in San Diego and would like to commend him on the leadership that he has taken on this issue.
Mr. DUNCAN. All right, thank you very much, Ms. Millender-McDonald.
Mr. Lipinski.
Mr. LIPINSKI. Thank you, Mr. Chairman.
Mr. Suomi, how are you today?
Mr. SUOMI. Good. Thank you, Congressman.
Mr. LIPINSKI. Nice to see you once again.
You are very familiar with the operations of the City of Chicago airports, having been employed there for a while. Can you tell me and tell the panel what your experience with BAA and your experience with the City of Chicago—would there be any advantage to the City of Chicago, that corporate entity, to privatizing Midway Airport, O'Hare Airport? Just looking at it from the perspective of the City of Chicago, would there be any advantages for the City of Chicago?
Mr. SUOMI. The advantages to any municipality, whether it be Chicago or otherwise, to a private sector approach to the airport is a sensitivity to operating the airport on a commercial basis with all of the sensitivities to increasing efficiency and controlling costs and driving economic development, as is the case with the private sector approach.
We see this in small ways even without the Pilot Program. For example, I mentioned earlier that private sector development of the Pittsburgh concessions increased the total revenues of that airport fourfold, the nonaeronautical revenues. The tax base, the sales tax on that type of revenue development at an airport is a way that ancillary revenue can legally flow to the airport owner right now.
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Under the pilot program, other things also could come about, not the least of which would be real property tax on the leasehold interest or on the actual sale.
But for the most part, the benefits are driven by the commercial approach, the efficiencies that go along with that, the increased customer service and the economic development.
Mr. LIPINSKI. There would not be anything that would prohibit the City of Chicago, though, from implementing any of those ideas, thoughts, suggestions, approach under its present situation, would there?
Mr. SUOMI. The major obstacle in terms of trying to, for example, privatize under the Pilot Program is going to be getting the airlines' approval to do that. If, in fact, you got that approval, then you would be able to reap the benefits that went along with it.
Mr. LIPINSKI. You talked about concessions, though, improving the concessions, the sensitivity to the people—
Mr. SUOMI. No. On that one aspect of it, no, there is nothing that would prohibit the City of Chicago from doing that on the concession development, as did Pittsburgh. I was referring to the entire airport operation. The concession is only one of the core competencies that the private sector brings.
Mr. LIPINSKI. But you just mentioned now about the city could get the airlines to do things. It would seem that based upon what I know the situation—you probably know better but I am not going to put you in that position right now—it seems to me that the city manages to get the airlines quite a bit at O'Hare Airport. It seems like they manage to get the airlines to do whatever they would like them to do at O'Hare Airport, but let me move on.
Pittsburgh. What do you manage in Pittsburgh?
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Mr. SUOMI. At Pittsburgh we are the retail food and beverage and duty-free developer for the airport. We do not operate any of the concessions but, in fact, we have leased about 125,000 square feet from Allegheny County within the airport. We and our tenants have done all of the build-out and then we sublease the various units to companies like The Gap, TGI Fridays and so on and so forth. They are all subleases of the master lease that we have with Allegheny County.
Allegheny County does not go out and procure leases for the airport. BAA does with its relationships that we have from our vast experience.
Mr. LIPINSKI. But that is all you handle at Allegheny Airport, correct?
Mr. SUOMI. At Pittsburgh Airport, yes.
Mr. LIPINSKI. What about in Indianapolis? What do you manage in Indianapolis?
Mr. SUOMI. At Indianapolis we operate the entire facility, not only the concessions but also the property development, the airfield operations, terminal development. Every employee save two or three for the authority are, in fact, BAA employees at Indianapolis. On October 1, 1995 all of the authority employees immediately became at midnight BAA employees.
Mr. LIPINSKI. Where does Indianapolis rank in enplanements in the United States? Do you have any idea?
Mr. SUOMI. Indianapolis is about number 46 out of 400 plus airports, about 7.5 million total passengers, maybe 8 million.
Mr. LIPINSKI. Moving over to Heathrow, you manage everything at Heathrow, correct?
Mr. SUOMI. That is correct, including some functions that airports in the United States do not typically manage. For example, the security systems at the airport when you go through the magnetometer, the x-ray machines, in the United States they are operated by the airlines. In the U.K. the airport does that. Yes, we do the entire airport operation.
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Mr. LIPINSKI. And you handle the security, also?
Mr. SUOMI. Yes, we do.
Mr. LIPINSKI. Do you handle security at any other airports in Great Britain?
Mr. SUOMI. Yes, at all of our airports in Great Britain. We do not in the United States, at Indianapolis or Harrisburg.
Mr. LIPINSKI. In Great Britain do you manage any other airports besides Heathrow?
Mr. SUOMI. We own and operate London Heathrow, Gatwick, Stanstead, Southhampton and the major Scottish airports. About 75 percent of the total passenger traffic in the United Kingdom goes through BAA-owned airports.
Mr. LIPINSKI. I believe in your testimony or perhaps it was one of the other two gentlemen but I believe it was your testimony, you talked about increasing competition. Were you referring to competition amongst air carriers for passengers?
Mr. SUOMI. I believe that was somebody else's testimony this morning.
Mr. LIPINSKI. That was your testimony?
Mr. BUTTARAZZI. Yes.
Mr. LIPINSKI. Okay, because I wanted to know if that was the case, I wanted to know how you were going to explain to me that Heathrow is probably the most restricted airport in the entire world and if you were an air carrier and you wanted to get in there, you would have an extremely slim chance of ever getting in there.
Mr. SUOMI. Had I had that testimony earlier, and we are speculating now, I would have answered that the slot issue at London Heathrow is a CAA function of the British government and not BAA, as the airport operator.
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Mr. LIPINSKI. So you run everything at Heathrow and Gatwick, et cetera, but you do not have anything to do with the slot issue.
Mr. SUOMI. No, in much the same way as it is in Chicago.
Mr. OBERSTAR. Would the gentleman yield?
Mr. LIPINSKI. I certainly would.
Mr. OBERSTAR. That is a very fine point and what you say obtains until the U.S. and U.K. negotiators meet to discuss access to the British air space by U.S. airlines. And then we get the British version of the old Western cowboy movie: ''They went thataway,'' because the government says, ''We cannot do this without British airport authorities,'' and you come and say, ''Oh, but that is a CAA authority.''
Mr. LIPINSKI. I thank the gentleman from Minnesota. He knows the aviation industry extremely well. And I would just like to say—I see my time has run out—I had the fortunate experience of leading a CODEL to Great Britain a few years ago in discussing the slot situation and I can testify first-hand that the testimony of Congressman Oberstar is absolutely correct because we met with BAA and we met with a whole bunch of government officials and every time we would bring up the slot situation those government officials would tell us, ''Well, that is really handled by the people who run the airport,'' who happens to be BAA. And when we went to BAA they told us it was handled by this agency of the British government.
So it is an interesting point, but I hope to get back there. The chairman is going to schedule a CODEL in the near future. I hope we will go back to Great Britain so we can discuss that issue once again and we will have to take someone from the FAA that is sitting here also, who has had experience along those lines.
Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you very much, Mr. Lipinski.
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Before we go to Mr. Oberstar, I am just curious. We have a briefing paper that was supplied to us that said ''Some estimate that Atlanta's Hartsfield and Chicago's O'Hare could be worth $6 billion each. Los Angeles International and Dallas-Fort Worth airports might be worth $5 billion apiece.''
Do any of you have any opinion as to whether those are realistic or anywhere near what those facilities might bring if they were sold to private interests?
Mr. SUOMI. I'm familiar with the numbers that you mention and it truly is speculation based simply upon the sales of other airports around the world and applying that sales amount per passenger to the traffic at those facilities.
It is an oversimplification in the sense that it does not take into consideration, for example, I do not believe, the existing bond indebtedness on the airports that would have to go along with the sale and grant pay-backs or other similar types of circumstances, but it is of an order of magnitude that it certainly tells you that there is a lot of inherent value in those facilities.
Mr. DUNCAN. Mr. Piscitell?
Mr. PISCITELL. My comment, you know, there are many valuation techniques that would be used by companies that would be interested in buying airports. We would be looking at not only the entrance price, how we would buy, finance and operate the airport, but what the objective or business plan would be for the airport, how we could grow the airport, provide needed service capacity, et cetera.
So any company would undertake their own valuation technique but we would clearly weight heavily what value we would add to any airport or any region that we made an investment in.
Mr. BUTTARAZZI. If I may add to that, as far as the accuracy of the numbers, it is always very difficult to determine that until you actually put it on the market. When we did Stewart Airport we did not set a reserve price. It was going to be the first transaction of its kind in the U.S. All the other experience, as you note in your opening statement, is overseas, so it is difficult to hang a price on it.
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The other thing I would like to point out, they are staggering numbers and they may very well be of that magnitude, but when with Stewart and certainly with Niagara and I think other airports in New York State if we continue to do this, we did not pursue the project as simply a means to cash-out the airport. I think it is significant, as Congressman Sweeney pointed out, that the lead agency here working hand in hand with the state department of transportation is New York's economic development agency.
We really looked at this as an economic development project to generate jobs and investment in the facility, so much so that when we solicited for bids, we asked the proposers—did not ask but required the proposers to submit two envelopes. One envelope was their business plan for the future of the airport. The other envelope was what they were willing to pay for it. And before opening the second envelope we examined the first envelope to judge that, evaluate that and make sure it confirmed to our RFP's guidelines before we went to the next.
So they are big numbers and they certainly can benefit the traveling public and their infrastructure but I think David pointed out there is more than simply just the investment or what they can bring to the table in forms of cash but it really is in forms of management.
Mr. DUNCAN. Thank you very much.
We are always pleased to have the ranking member of the full committee, the former chairman of this subcommittee, Mr. Oberstar with us. Mr. Oberstar?
Mr. OBERSTAR. Thank you very much, Mr. Chairman, for your good words and for pursuing this further inquiry into privatization. Thank you and Mr. Lipinski on the splendid work you have done on this subject.
Mr. Suomi, it is so good to see you again.
Mr. SUOMI. Thank you.
Mr. OBERSTAR. There is a college named after this witness—it bears the same name—in northern Michigan, Suomi College, started to serve the Finnish population of northern Michigan and a great many of the Americans of Finnish ancestry from my district have attended Suomi College. You probably did not, however.
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Mr. SUOMI. No, I did not. I have to admit that.
Mr. OBERSTAR. In the ownership that British Airport Authority has of the seven U.K. airports, does BAA have the competency to exert eminent domain authority in the event that it were planning to build an additional runway or extend a runway or for any other valid airport purpose? Does the Authority have the cover and the character of government in that regard?
Mr. SUOMI. To the best of my knowledge, we do not. It is no longer an authority but simply a private sector publicly traded company. We would have to go back to the central government to get that type of approval, just like we are doing now on Terminal 5.
Mr. OBERSTAR. Were it possible to build an additional runway at Heathrow—it is theoretically possible but in the practical realm, from all the discussions I have had, it is not, at least in the short term, five years or so, realistically possible to build another runway, though that would greatly enhance capacity and the ability of U.K. and foreign carriers to compete through that hub.
But were it possible, BAA would be able to float bonds, raise the capital to undertake the initiative, correct?
Mr. SUOMI. In terms of the policy on runway, I am not going to address that as much as to say that BAA does have the financial wherewithal to finance capacity improvements at the airport, in much the same way that we are prepared to underwrite what I believe is about a $2 billion cost of Terminal 5 right now.
Mr. OBERSTAR. And in the process of Terminal 5 or a new runway, in coming to the decision to raise the capital to undertake the expansion, what was the role of the carriers in that decision-making process?
Mr. SUOMI. You are asking questions that as a U.S. subsidiary, I am not intimately familiar with. I can get you those answers. However, it is my understanding that the Terminal 5 inquiry moved in lock-step with the carriers from day one with very heavy airline involvement from the very beginning. But I really do not have a significant amount of detail beyond that.
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Mr. OBERSTAR. Do they have a veto authority over a decision to proceed? Must you get a certain percentage of carriers in accord, as we call them in this country, majority in interest carriers?
Mr. SUOMI. I am not familiar with that. I can find out for you.
Mr. OBERSTAR. You see, in your testimony you say that carriers ''seem to accept this inefficiency as a cost of doing business. The fear of the unknown outweighs the potential benefits of a new approach.'' But I think in the U.K., carriers are as much involved in the decision-making process as they are in the U.S. I just do not recall from discussions I had almost six years ago in the U.K. what the role and the ability of carriers is to block an expansion that they think will saddle them with unacceptably high costs—fees, and other assessment on the carrier.
You see, that obtains in the U.S. for publicly owned, as well as privately operated facilities. So I think that your comment is not consistent with practice in the U.K. or with practice—because the carriers, if they determine that runway improvement is going to result in such a huge cost, except if that runway is financed entirely with PFC, can stop it and avoid these costs. They have a say in all those costs.
So I think that to say that they are accepting inefficiencies that result in high costs does not reflect the reality of the relationship between carriers and airports, and I do not see how that then is any different from a privately owned and operated airport. If at Heathrow or Gatwick your company decided that it wanted to make certain improvements that would result in covering those costs from carriers in the form of fees, I think carriers would have a way of objecting to those increases.
Mr. SUOMI. The fees and charges to the carriers at the London airports are the subject of review by the Mergers and Monopolies Commission.
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Mr. OBERSTAR. That is right.
Mr. SUOMI. And the airlines certainly have input into that process and have enjoyed real decreases in their costs every year since the airport was privatized after all of that investment in facilities.
I was speaking more to the specific question that I thought you were asking, of whether or not there is an additional MII-type of control over projects between BAA as the airport operator and the tenant airlines. And to that issue I cannot address it but I would be more than happy to find out.
Mr. OBERSTAR. Thank you very much. I would appreciate your providing that information to the subcommittee.
Mr. Piscitell, from your perspective as an asset management group, which of these conditions on privatization would have to be removed in order to make possible privatization, as in the case of the U.K., outright sale to a private entity: prohibition on revenue diversion, recovery by the federal government of the AIP cost of past development of the airport, tax code benefit to the private owner so that it could be in a position of issuing bonds comparable to tax-exempt bonds?
Mr. PISCITELL. Well, the project in San Diego, the way it is structured, we are actually complying with all three points you made there because we are extending the runway, we are purchasing roughly $50 million of land to extend the runway we have through—
Mr. OBERSTAR. Which airport is this?
Mr. PISCITELL. This is in San Diego, the Brown Field Aviation Park. It is the San Diego Air Commerce Center. We are actually extending the runway—
Mr. OBERSTAR. I am not familiar with it. Was that a previously publicly owned airport?
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Mr. PISCITELL. It is owned and operated currently by the City of San Diego.
Mr. OBERSTAR. It is owned but it has not been sold to—
Mr. PISCITELL. No. We have made an application—
Mr. OBERSTAR. So all of those improvements are being made in the name of the publicly owned authority?
Mr. PISCITELL. The improvements will be made in the name of the publicly owned authority.
Mr. OBERSTAR. My question was in the case of a sale, which of these are such impediments that for a sale to a private interest, would have to be removed?
Mr. PISCITELL. Well, revenue—
Mr. OBERSTAR. Revenue diversion, repayment of the original cost of public investment and access to AIP grants—which of those is impediments to a sale?
Mr. PISCITELL. Using our San Diego model, none of those are impediments to how we are structuring the project right now.
Mr. OBERSTAR. But it is not a sale. You are not the owner.
Mr. PISCITELL. But in the event that we did own the project, the way we have structured the financing, we are not assuming that we are going to receive any AIP grants. The revenue diversion is a major impact for the City of San Diego and one of the driving forces behind the privatization. And I must admit it took them a while to understand the impact on the city of revenue diversion and we have been able to structure the transaction in such a way so we can use tax advantage financing to finance the airport.
In the event that there was a sale of the airport, that would limit our use of tax-exempt financing and drive up our cost of funds, but there may be some off-setting benefits to actual ownership. And the length of the lease is obviously a driver behind how we would calculate our returns.
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But revenue diversion is always critical because the city—what would they do with the capital if they sold an airport or the constituent agency? What would they do with the money?
Mr. OBERSTAR. Thank you very much. I appreciate that.
Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you very much, Mr. Oberstar.
And gentlemen, thank you. You have given very interesting, very informative testimony and been very helpful and we certainly appreciate the knowledge that you have brought to this table today and thank you for being with us.
We will call our next witness at this time. The next witness is Mr. David Bennett, who is director of the Office of Airport Safety and Standards with the Federal Aviation Administration. Mr. Bennett, if you will take your seat, you may begin your testimony. Thank you very much for being with us today.
TESTIMONY OF DAVID L. BENNETT, DIRECTOR, OFFICE OF AIRPORT SAFETY AND STANDARDS, FEDERAL AVIATION ADMINISTRATION
Mr. BENNETT. Thank you very much, Mr. Chairman.
Mr. Chairman, Congressman Lipinski, Members of the Subcommittee, I am pleased to appear before you today to discuss the status of the Airport Privatization Pilot Program. This morning I would like to briefly describe the administration of the program by the FAA and provide a short summary of the status of the applications for participation in the program.
This innovative program is authorized in legislation enacted in 1996. In brief, the legislation authorized the FAA to exempt up to five airports from all or part of the requirements to use airport revenue for airport purposes, the requirement to pay back a portion of grants upon the sale of an airport, and the requirement to return airport property deeded by the Federal government on the transfer of the airport. The Administrator is also authorized to exempt the private purchaser or lessee of the airport from the requirement to use all airport revenues for airport purposes to the extent necessary to permit the private operator to earn compensation from the operations of the airport.
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The legislation required that at least one of the five airports had to be a general aviation airport and that not more than one could be a large hub airport.
The legislation authorizing the program was enacted in 1996. Shortly after that, the FAA Associate Administrator for Airports and I scheduled a series of meetings with representatives of airports, air carriers, private developers, bond markets and others with an interest in the pilot program.
In April the FAA published a Notice of Proposed Application Procedures and held a meeting in May of 1997 on the procedures. Based on the public comments we received, we issued Final Application Procedures, giving details on how to apply for the program in September of 1997.
In response to some of the comments we received, the procedures provided for a two-step application process. Under that, a public sponsor files a preliminary application with the FAA indicating its intent to privatize the specific airport and providing preliminary information, including the objectives for the privatization, description of the process, and financial information about the airport.
The sponsor must include a reasonable, realistic timetable to be employed in selecting a new airport operator and completing the transfer of the airport so the FAA can anticipate when the final application would be submitted. And This is not for the FAA's convenience. Rather, it is to make sure that an applicant, having filed the application, does not take up one of the five spaces in the program without making progress toward final exemption.
Finally, the preliminary application must show that the local government has taken the necessary steps under its own legal process to approve the sale or lease of the airport. The preliminary application requires enough information to show that a sponsor is serious about a privatization project but also allows the sponsor to be sure of an opportunity to participate in the program before going through the process of negotiating and selecting a private operator.
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Once the FAA has accepted the preliminary application for review, the sponsor begins a process of selection and negotiation with the private operator. When the sponsor has selected the operator and reached agreement with that operator on the terms of the transaction in sufficient detail to describe those terms in an application, the sponsor files a final application with the FAA.
When we consider that application, we consider the legislation and we review several key areas. They include the qualifications of the operator to operate an airport, how the air operation and development of the airport in the future will be affected, whether any required approval of air carriers serving the airport has been obtained, and whether the terms of the transaction meet all of the other requirements of the statute.
The private operator must be qualified to be a sponsor under the Airport Improvement Program, must be able to meet Part 139 safety requirements and Part 107 security requirements if they apply to the particular airport.
While the application does require substantial information from the parties, we have carefully avoided dictating how the privatization must be done and the structure of it is left to the sponsor and the private operator.
Although the application procedures for the pilot program are straightforward and uncomplicated, the details and the process of transferring an entire airport and obtaining local consensus for the transfer can be complex and time-consuming, as we heard earlier. The FAA recognizes that the concept of privatization is new in the U.S. and that public sponsors may be uncertain if they want to pursue this option.
The FAA Office of Airports has encouraged airport sponsors who want to explore airport privatization to meet with us as early as possible in the process in order to understand it and understand the requirements of the program and other requirements of Federal law and a number of sponsors have met with us for that purpose.
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In addition, we work closely with an airport sponsor who decides to pursue privatization to assist the sponsor with development and refinement of the preliminary and final applications. We will continue to work with any community that is interested in learning how the Airport Privatization Pilot Program could provide different and innovative opportunities for its airport.
Under the pilot program to date, the FAA has received two preliminary applications from airport sponsors—New York State for Stewart and the City of San Diego for Brown Field, which we heard about in detail earlier.
The final application for Stewart was filed on January 10, 1999. In accordance with our procedures, we published a Notice of Final Application regarding the airport in the Federal Register on April 8, providing for a 60-day public comment period. We recently held a public meeting on the application in New Windsor, New York on June 11 and extended the comment period until June 28 to accommodate anyone who wanted to file comments on information provided at that public meeting.
All of the comments from the public meeting were recorded by a court reporter and they will be placed in the public docket and will be considered by the FAA in its decision on the exemption. It our hope that the remaining outstanding issues with regard to Stewart can be resolved in time to permit the privatization to proceed shortly and hopefully within the next several months.
With regard to San Diego, as we heard earlier, we are continuing to work with the sponsor and the private operator selected by the city. We know that there are continuing negotiations and the local environmental review process is also taking quite a bit of time in that case. We have tried to be responsive to the application. There are a few remaining details, notably the exact date when they expect to file the final application. I would say that in the case of both applications, the city and the private operator have been very helpful in answering the FAA's questions and in this case we anticipate the preliminary application could be approved within the next two months.
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We have also heard that the Niagara Frontier Transportation Authority will file a preliminary application under the pilot program this week for Niagara Falls International Airport in New York and that would be the third application under the program.
In conclusion, I would like to say that the FAA understands the potential of the program to demonstrate the ability of privatization of airports to make new sources of private financing available for airport development and operation. We have tried to balance our application procedures to obtain all the information necessary to make the findings required under the statute but, at the same time, to leave sponsors and private companies the flexibility to decide on how the privatization of a particular airport will be structured.
We will continue to make every effort to make information on the program available to sponsors that are interested in pursuing privatization as early in the process as possible and to work closely with a sponsor who proceeds with an application.
Mr. Chairman, that concludes my testimony. I would like to thank the Subcommittee for holding the hearing and I would be happy to discuss any aspects of the program and the FAA's role in it and answer any questions you have.
Mr. DUNCAN. Thank you very much, Mr. Bennett.
I will go first to Mr. Lipinski for any questions or comments.
Mr. LIPINSKI. Thank you, Mr. Bennett. Why do you think that privatization is going so slow in this country in comparison to how successful it appears to be around the rest of the world?
Mr. BENNETT. I think there are probably different conditions from country to country but if there are two consistent things that are probably different, one is that in most of the privatizations in other countries, the status of ownership before the privatization was that airports were owned by the Federal government, the national government, or sometimes even the military. That is probably the least efficient form of airport ownership and operation, and I think there was an interest in moving away from that that drove the privatization.
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Second, as we also heard earlier, in the U.S. there are sources of public and commercial financing available to local governments that may not be available in other countries, to public operators. That is an additional motivation for private ownership in other countries.
I think those are two kinds of general reasons that conditions are different in the U.S. than overseas.
Mr. LIPINSKI. Thank you, Mr. Bennett. I really have no other questions, Mr. Chairman.
Mr. DUNCAN. Mr. Bennett, you heard Mr. Buttarazzi say that he had found interest from others around the country. Are you finding similar interest? You heard me say at the beginning that one columnist said this was the wave of the future and another official, though, said there was not as much interest as there was, he didn't think, three or four years ago when we really got into this at the start.
Do you think the interest is growing or, as I mentioned in my opening statement, is this sort of a passing fancy?
Mr. BENNETT. It is hard to tell if it is growing. I think it is steady and the fact that we have had two good applications and apparently another one coming in under the program of five is a good sign that the program has something that appeals to communities. And I think we have to realize that there are a lot of conditions locally that might go into a decision whether to sell or lease the local airport that have nothing to do with Federal impediments or incentives and those things, I am sure, are being discussed, but they are not really brought to our attention.
We see somebody expressing an interest at the time they need to ask about the Federal program, and we have had several communities ask about it and they may still be thinking about it. We do not know the status of those.
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Mr. DUNCAN. Well, is this something that the FAA is interested in? I mean do you think you have a good program now or do you think that there are some things, some changes that need to be made in it? Do you think this is something the FAA should encourage or is it just something that is going to muddle along?
Mr. BENNETT. Well, we consider the form of ownership of an airport to be a local matter, so we do not push airports one way or the other, even among the various forms of public ownership. I think that is a local decision.
What we have done is make the knowledge of the program and the availability of it and accessibility of it as open and as accessible as we can and we have talked about it in conferences all over the country and put things in the Federal Register and people know about it.
We do not have any immediate suggestions for changes to the program. We have been able to administer it very easily, staying very close to the statute, and the number five seems to be about right, given that we have had three applications come in so far and I think we can expect to see two more at some point.
Mr. DUNCAN. You were sitting there when Mr. Suomi made his suggestions on ways that he thought the statute should be changed. Do you have any comments on that or did you have any reaction to what he said?
Mr. BENNETT. Well, I guess we really do not have a position on the suggested changes to the statute.
Mr. DUNCAN. And did I understand you correctly that you think that the Stewart application, that your process or your work on that should be done within the next couple of months?
Mr. BENNETT. Well, it is not our work at this point. We do have the application but I think there are some continuing details worked out locally. As Mr. Buttarazzi said, this is the first one we are seeing. We met with the state just last week to talk about possible amendments to the surplus property deed and it is one of the things that has to be considered in any privatization but, of course, this is the first one, so we will have to think about how to do it.
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I do not think that we would take a great deal of time, once we have all the information we need, to go forward and prepare the decision and issue the exemption. We will have to describe how the application meets all of the findings in the statute, so that will have to be documented in a record of decision, but we will do that as quickly as we can. We understand their interest in moving forward.
Mr. DUNCAN. All right. We thank you very much for being with us. We certainly appreciate your testimony.
That will conclude this hearing.
[Whereupon, at 11:55 a.m, the subcommittee adjourned.]
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