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United States Government Accountability Office: 
GAO: 

Report to Congressional Addressees: 

November 2014: 

Airport Privatization: 

Limited Interest despite FAA's Pilot Program: 

GAO-15-42: 

GAO Highlights: 

Highlights of GAO-15-42, a report to congressional addressees. 

Why GAO Did This Study: 

Nearly all the 3,330 airports in the national airport system in the 
United States are publicly-owned and operated. However, some argue 
that the private sector could better fund and operate airports than 
public owners. GAO reported in 1996 that many barriers to full 
privatization existed in the United States. In 1996, Congress created 
the APPP which reduced some of the barriers to privatization. However, 
over the program’s 18 years only two airports have privatized and one 
of them has reverted to public control. 

To better understand airport privatization, GAO was asked and mandated 
to review several aspects of privatization. Specifically, this report 
describes (1) the experience with the APPP; (2) challenges airport 
owners and investors face to full airport privatization; (3) the 
potential effects of airport privatization; and, (4) reasons why 
airport privatization is more prevalent outside of the U.S. and 
stakeholder views on the APPP. 

GAO reviewed airport application and docket information and 
interviewed applicants. GAO also interviewed 42 airport stakeholders 
including airports, airlines, airport consultants, labor groups, and 
private airport operators and financiers to gain their views on 
airport privatization in the U.S. and other countries. This non-
generalizable group was mainly selected from our review of APPP docket 
documents and our prior work on airports. 

DOT reviewed a draft of this report and provided technical comments 
which were incorporated as appropriate. 

What GAO Found: 

Since the FAA started to accept applications to the Airport 
Privatization Pilot Program (APPP) in 1997, 10 airports have applied 
to the pilot program (see figure). Of these 10, 2 were privatized, 7 
did not complete the program, and one application is currently under 
FAA review. Public-sector airport owners’ objectives for full 
privatization varied, but the overriding reason cited was financial 
benefit. The 7 applicants that withdrew did so for varied reasons, 
such as changes in market conditions that reduced expected 
privatization benefits. 

Several factors reduce both public and private sector interest in 
airport privatization in the U.S.-—such as higher financing costs for 
privatized airports and the possible lack of state and local property 
tax exemptions. Also, while the APPP reduces some of the challenges to 
privatization that we identified in 1996, privatization still requires 
considerable time and cost to navigate. Furthermore, public sector 
airport owners have found ways to gain some of the potential benefits 
of privatization without ceding control under full privatization, such 
as entering airport management contracts and joint development 
agreements for managing and building an airport terminal. 

The potential effects of airport privatization on airport efficiency, 
the federal aviation trust fund, federal tax revenues, and airport 
employees and concessionaires are difficult to determine. 
Privatization’s impact on these areas depends on many different 
factors such as how each airport privatization is structured, making 
it difficult to estimate the overall impact. 

Different airport ownership and financing structures and motivations 
have driven more extensive overseas privatization efforts, as at least 
450 airports around the world have been privatized to some degree. 
Stakeholders mentioned a variety of lessons learned from the U.S. and 
international experience, including ensuring public-sector due 
diligence, involving all stakeholders and creating a transparent 
privatization process. Stakeholders also provided a range of 
suggestions for modifying the APPP, from increasing the clarity of the 
program’s rules to reducing the federal role in airport privatizations. 

Figure: Airports That Have Applied to the Airport Privatization Pilot 
Program, 1997–2014: 

[Refer to PDF for image: illustrated U.S. map] 

Commercial airports: 

Chicago Midway International Airport (Chicago, IL); 
Louis Armstrong New Orleans International Airport (New Orleans, LA); 
Luis Munoz Marin International Airport (San Juan, Puerto Rico); 
Rafael Hernandez Airport (Aguadilla, Puerto Rico); 
Stewart International Airport (Newburgh, NY). 

General aviation airports: 

Airglades Airport (Clewiston, FL); 
Brown Field Municipal Airport (San Diego, CA); 
Gwinnett County Airport-Briscoe Field (Lawrenceville, GA); 
New Orleans Lakefront Airport (New Orleans, LA); 
Niagara Falls International Airport (Niagara Falls, NY). 

Source: GAO analysis of FAA data. GAO-15-42. 

[End of figure] 

View [hyperlink, http://www.gao.gov/products/GAO-15-42]. For more 
information, contact Gerald L. Dillingham, 202-512-2834 or 
dillinghamg@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

The Airport Privatization Pilot Program Has Resulted in Few 
Privatizations: 

Several Factors Limit Demand for Privatization, yet the Potential 
Benefits of Private Investment and Expertise Can Be Achieved without 
Relinquishing Airport Control: 

Potential Effects of Airport Privatization Are Difficult to Determine: 

Airport Privatization Is More Prevalent in Other Countries and 
Stakeholders' Views on Privatization Vary Widely: 

Concluding Observations: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Airport Privatization Lessons Learned Offered by 
Stakeholders Interviewed: 

Appendix III: APPP Improvements Mentioned by Stakeholders Interviewed: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Financial Structure for the Lease Payment and Financing of 
Selected U.S. Airports That Submitted a Final Application to the APPP: 

Table 2: Airport Privatization Stakeholders GAO Interviewed: 

Table 3: Lessons Learned Offered by Stakeholders Interviewed: 

Table 4: APPP Improvements Suggested by Stakeholders Interviewed: 

Figures: 

Figure 1: Extent of Privatization at Airports in the United States: 

Figure 2: Airport Privatization Pilot Program Application Process: 

Figure 3: APPP Applicant Airports, 1997--2014: 

Figure 4: Airport Privatization Pilot Program for Stewart (1997-2000) 
and Luis Munoz Marin (2009-2013): 

Figure 5: Length of Time an Applicant Was Active in the APPP, 1997--
2014 (in Months): 

Abbreviations List: 

ACRP: Airport Cooperative Research Program: 

AIP: Airport Improvement Program: 

APPP: Airport Privatization Pilot Program: 

BAA: British Airports Authority: 

CRS: Congressional Research Service: 

FAA: Federal Aviation Administration: 

ICAO: International Civil Aviation Organization: 

IRS: Internal Revenue Service: 

MidCo: Midway Investment and Development Company: 

NPIAS: National Plan of Integrated Airport Systems: 

NEG: National Express Group: 

NYDOT: New York Department of Transportation: 

PANYNJ: Port Authority of New York and New Jersey: 

PFC: Passenger Facility Charges: 

PRPA: Puerto Rico Ports Authority: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

November 19, 2014: 

Congressional Addressees: 

Most public-use airports in the United States have been publicly-
owned, operated, and financed since commercial aviation service 
started in the 1920s.[Footnote 1] Domestic interest in privatization 
has been sparked by (1) airport's estimated capital costs, projected 
to be an average of $13.1 billion per year between 2013 and 2017; (2) 
the privatization of hundreds of airports around the world; and (3) 
the belief that private owners could operate airports more efficiently 
than public owners.[Footnote 2] Others argue that airports already 
have extensive private sector participation through food and rental-
car concessions or management contracts for whole airports. They also 
argue that the federal government has invested heavily in airports--
about $57.6 billion in grants from federal airline ticket taxes 
through the Airport Improvement Program (AIP) from 1993 through 2013 
alone--investments which could potentially be turned over to the 
private sector without adequate compensation under privatization. We 
reported in 1996 that there were many legal and financial barriers to 
privatizing airports in the United States.[Footnote 3] In 1996, 
Congress created the Airport Privatization Pilot Program (APPP) to 
alleviate some of these barriers and test the potential for greater 
privatization.[Footnote 4] However, over the last 18 years since the 
APPP's inception, two airports were privatized under the pilot, and 
one of them has reverted to public sector control. 

To better understand airport privatization, particularly with respect 
to the APPP, you asked us and we were mandated to review several 
different aspects of privatization.[Footnote 5] Specifically, this 
report describes (1) the experience with the APPP since its inception; 
(2) challenges airport owners and investors face when seeking to 
privatize U.S. airports; (3) the potential effects of airport 
privatization; and, (4) reasons why airport privatization is more 
prevalent outside of the United States and stakeholder views on 
whether and how to revise the APPP. 

To address these objectives, we analyzed the Federal Aviation 
Administration's (FAA) APPP documentation and public docket documents 
from 1997 to 2014 relating to each airport's application to the APPP. 
We conducted site visits to Chicago, Illinois and San Juan, Puerto 
Rico to interview FAA and local stakeholders about Chicago's Midway 
International Airport (Midway) and San Juan's Luis Munoz Marin 
International Airport (Luis Munoz Marin) APPP applications and 
processes and the potential and actual impacts of airport 
privatization. We selected these sites because they were the two of 
the largest airports in the APPP and because Midway went through a 
significant amount of the process but remained in public sector 
operation while Luis Munoz Marin went through the APPP process and did 
privatize. We reviewed industry and think-tank reports and interviewed 
42 airport privatization stakeholders to obtain their views on the 
challenges of airport privatization in the U.S., the prevalence of 
airport privatization in other countries, and the potential impacts of 
airport privatization. These stakeholders included: FAA headquarters 
and regional officials; local public-sector airport owners; airlines; 
private-sector airport operators, consultants and investors; bond-
rating agencies; airport labor groups; airport concessionaires, 
academic and other experts, and local public interest groups. We 
selected these stakeholders from our prior work on airports, from our 
review of APPP docket documents and their work on both U.S. and 
foreign airport privatizations. The results of our interviews with 
these stakeholders are not generalizable. For more details on our 
objectives, scope and methodology, see appendix I. 

We conducted this performance audit from January 2014 to November 2014 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

Nearly all of the 3,330 commercial service or general aviation 
airports designated as part of the national airport system are under 
city, state, county or public-authority ownership.[Footnote 6] Airport 
ownership in the United States has evolved under a public model since 
the 1920s as a way to promote the development of the U.S. aviation 
industry. The Surplus Property Act of 1944 transferred excess military 
bases and property to state and local governments for use as public 
airports and was a contributing factor to the development of airports 
as a public asset.[Footnote 7] 

Privatization generally refers to shifting governmental functions and 
responsibilities to the private sector. FAA more specifically has 
defined airport privatization as transferring airport operations from 
the public sector to the private sector through a formalized transfer 
of federal grant obligations and the granting of a Part 139 operating 
certificate to the new airport operator.[Footnote 8] However, private 
sector involvement in airports can and does take many forms not 
necessarily requiring the transfer of ownership control of the 
airport. A 2012 Airport Cooperative Research Program (ACRP) report on 
airport privatization, for example, identifies the general forms of 
airport privatization, ranging from the least amount of private sector 
activity (service contracts) to full privatization (sale or lease of 
airport in its entirety) as outlined in figure 1 below.[Footnote 9] 

Figure 1: Extent of Privatization at Airports in the United States: 

[Refer to PDF for image: illustration] 

Listed from Least privatization to Most Privatization: 

Service contracts: 
Examples: 
* Cleaning/janitorial; 
* Security guards; 
* Parking operations; 
* Terminal concessions. 

Management contracts: 
Examples: 
* Specific facility (e.g., parking); 
* Airport-wide management. 

Developer financing/operation: 
Examples: 
* Terminal development; 
* Cargo; 
* Car rental facility; 
* General aviation. 

Long-term lease or sale: 
Examples:
* Airport Privatization Pilot Program; 
* Long-term lease or full operation and development. 

Source: GAO analysis of ACRP information. GAO-15-42. 

[End of figure] 

At one end of the privatization continuum, nearly all domestic 
airports rely on services contracts for janitorial services, parking 
operations, or terminal concessions, which are leases with private 
vendors acting as tenants. Next in the continuum are management 
contracts for airport operations, where airport owners contract out 
management of either specific operations (like the management and 
operation of parking facilities or terminal operations) or contract 
out the entire airport to a private sector entity. As an example of 
the latter, AvPorts Management LLC, a private sector airport operating 
company, manages Albany International Airport and is responsible for 
airport management, operations, maintenance, airport rescue and fire, 
parking lot operations, shuttle bus operations, and operation and 
management of aircraft deicing collection and treatment systems. Next 
are private developers, financers, and operators, who provide capital 
investment for airport development. In this scenario, private 
investors finance the development of a terminal or facility and may be 
responsible for its operations and maintenance in return for a share 
of the revenues. One example is at Terminal 4 of the Port Authority of 
New York and New Jersey's (PANYNJ) John F. Kennedy International 
Airport where the private sector developed and manages the terminal, 
but PANYNJ maintains overall operations of the airport. At the most 
privatized end of the continuum is the sale or long-term lease of the 
entire airport asset to a private sector operator. Of the 501 
commercial service airports in the United States, private sector 
operators hold Part 139 airport operating certificates for only 2--
Luis Munoz Marin, which is under a 40-year lease, and Branson Airport 
in Missouri, which was privately developed.[Footnote 10] Currently, a 
private-sector airport operator holds the FAA Part 139 airport 
operating certificate for only 1 of the 3,330 airports that the FAA 
has designated for inclusion in the NPIAS, at Luis Munoz Marin. 

In the United States, airport capital investments are generally funded 
through a combination of federal Airport Improvement Program (AIP) 
grants, federally-authorized Passenger Facility Charges (PFC), and 
locally generated aeronautical and non-aeronautical revenues.[Footnote 
11] For larger capital projects, airports often issue bonds, backed 
either by these revenue streams or by the general taxing authority of 
the public-sector airport owner. 

* AIP grants: FAA provides both apportionment and discretionary grants 
to airports, which have averaged in total a little over $3 billion 
annually.[Footnote 12] All airports in the NPIAS are eligible to 
receive apportionment grants, which are determined on an annual basis 
for primary airports by a formula based on the number of passengers 
and amount of cargo carried. For non-primary airports, the funding 
formula is based on the development needs at those airports as 
identified in the NPIAS, with a minimum apportionment grant of 
$150,000.[Footnote 13] These airports may also compete for AIP 
discretionary grants, which fund national priorities and objectives 
that enhance capacity, safety, or environmental concerns. Grants 
require a local match of 5 to 30 percent depending on airport size or 
type of project.[Footnote 14] 

* PFC charges: The PFC program authorizes participating airports to 
collect up to $4.50 per boarded passenger, per flight segment. 
[Footnote 15] Airports apply for participation in the program, and if 
approved, funds collected by airlines through fees placed on passenger 
tickets are remitted to airports to use for FAA-approved development 
projects that preserve or enhance airports' safety, security, or 
capacity; reduce noise; or enhance airline competition.[Footnote 16] 
Additionally, PFCs can also be used to pay interest costs on debt 
issued for FAA-approved airport development projects.[Footnote 17] 
According to FAA, 388 commercial service airports were approved to 
collect PFCs as of April 2014.[Footnote 18] Annual PFC collections 
totaled about $2.8 billion in calendar year 2013, with the most 
collections going to large and medium hub airports, proportionate to 
their number of passenger boardings. 

* Locally generated revenues: Aeronautical revenue is generated from 
airlines and general aviation users of the airfield or terminal and 
includes charges for aircraft-landing fees and terminal rentals. While 
the FAA ensures that airport rates and charges to airlines are 
reasonable, as required by federal law, through its grant agreements 
with airport owners, it does not set those rates.[Footnote 19] Non-
aeronautical revenue includes rents the public owner collects from 
restaurant and retail concessionaires, rental car concessions, and 
parking-garage fees. These revenue streams are used as repayment of 
bond debt issued to finance various airport capital-improvement 
projects including both new and rehabilitated facilities. We have 
reported that on average about 55 percent of airport revenues come 
from aeronautical charges and 45 percent come from non-aeronautical 
charges.[Footnote 20] 

Our last report on airport privatization in 1996 found that the full 
privatization of airports in the United States was unlikely due to a 
myriad of legal and financial barriers. Most significantly, airports 
that received AIP grants were subject to grant obligations that 
preclude any airport revenue for non-airport purposes by the public-
sector airport owner (revenue diversion).[Footnote 21] As a result, if 
such an airport were to be fully privatized, then the public-sector 
owner could not use any of the proceeds from the lease or sale of the 
airport for any purpose other than reinvesting in the airport (or any 
other airport owned by the public sector entity); nor could the 
private sector operator or owner retain profits earned from the 
privatized airport. Another barrier we identified was private airport 
owners' ineligibility to collect PFC's or receive AIP grants.[Footnote 
22] In addition, the public-sector owner of an airport that was 
privatized could have been required to repay federal grants or return 
surplus federal property at that airport. Finally, unlike public 
airports, privatized airports would not be able to obtain access to 
tax exempt debt.[Footnote 23] 

The Federal Aviation Reauthorization Act of 1996 alleviated some of 
the challenges mentioned above by establishing the Airport 
Privatization Pilot Program (APPP).[Footnote 24] Under the APPP, 
commercial service airports can be leased while general aviation 
airports can be sold or leased subject to certain conditions.[Footnote 
25] The sale or lease proceeds can also be used for non-airport 
purposes if at least 65 percent of the air carriers serving the 
airport approve.[Footnote 26] The APPP enables commercial service and 
general aviation airports that are privatized under the APPP to 
continue to collect PFCs and receive AIP grants.[Footnote 27] Airports 
can also continue to collect AIP discretionary grants, although their 
match would increase to 30 percent.[Footnote 28] Finally, the 
Secretary of Transportation (Secretary) can waive: repayment of 
federal grants; the requirement to use airport revenues for non-
airport purposes, and; the required return of federal property if the 
Secretary determines that public investments previously made in 
airports are protected and airports continue to be available for 
public use.[Footnote 29] The 1996 FAA Reauthorization Act allowed five 
airports to participate and mandated that only one participating 
airport could be a large hub and that at least one participant had to 
be a general aviation airport.[Footnote 30] The FAA Modernization and 
Reform Act of 2012 increased the number of potential participants to 
10.[Footnote 31] 

Under the APPP, the current public-sector airport owner is responsible 
for overseeing the privatization process by satisfying all legal 
requirements and selecting the private bidder.[Footnote 32] To 
initiate the APPP process, public-sector airport owners can submit to 
FAA for approval either a preliminary application without a private 
operator selected or a final application that identifies a selected 
private operator. FAA is to review the application, provide comments, 
and if approved, award the public owner a slot in the privatization 
program. If the public-sector airport owner submitted a preliminary 
application, a confirmed slot in the program means the applicant can 
select a private operator, negotiate lease terms, and submit a final 
application for FAA approval. Once the final application is accepted, 
FAA is to provide notice for a 60-day public comment period, hold a 
public meeting towards the end of this period, and respond to comments 
received. This process is outlined in figure 2 below. 

Figure 2: Airport Privatization Pilot Program Application Process: 

[Refer to PDF for image: process illustration] 

Airport owner completes preliminary application: 
Preliminary application should include: 
* Objectives of privatization; 
* Description of process and timetable; 
* Airport financial statements; 
* Proposed request for proposals. 

FAA review of preliminary application: 
* FAA must respond within 30 days accepting the preliminary 
application and awarding a slot in the pilot program. 

Airport owner completes selection of private operator and negotiations: 
* Selection of private operator; 
* Negotiations (lease agreement, airlines, stakeholders, etc.). 

Airport owner completes final application phase: 
* Submission of final application including lease agreement, terms of 
transfer, statement of qualifications of private operator, requests 
for exemptions, certification of airline approval of exemptions (if 
necessary), description of airport operations, maintenance and 
development. 

FAA review and public comment phase: 
* 60-day public comment period and public meeting; 
* FAA review of final application and determination of approved 
exemptions (including amount of federal funds that do not need to be 
repaid). 

Transfer to private operator: 
* FAA submits a Record of Decision detailing specifics of the deal and 
determination regarding issuance of exemptions; 
* Part 139 certificate transferred to private operator. 

Source: GAO analysis of FAA information. GAO-15-42. 

[End of figure] 

The Airport Privatization Pilot Program Has Resulted in Few 
Privatizations: 

Airports That Participated in APPP Sought Financial or Economic 
Benefits: 

Since the FAA started accepting applications in 1997, 10 airports (5 
commercial service and 5 general aviation or general aviation reliever 
airports) have applied to the pilot program. Those 10 airports are 
identified in figure 3. Public-sector airport owners' objectives for 
full privatization varied; however, the overriding reason for 
privatization for nearly all applicants was to gain some financial 
benefit. Nine of 10 applicants indicated that obtaining either a 
financial return from leasing or selling the airport or economic 
development benefits for the local community were objectives for 
transfer of airport control under the APPP. These financial returns 
could include an up-front lease payment or on-going payments from the 
private-sector airport operator over the life of the lease, or a 
combination of both types of payments.[Footnote 33] 

Figure 3: APPP Applicant Airports, 1997--2014: 

[Refer to PDF for image: illustrated U.S. map] 

Commercial airports: 

Chicago Midway International Airport (Chicago, IL); 
Louis Armstrong New Orleans International Airport (New Orleans, LA); 
Luis Munoz Marin International Airport (San Juan, Puerto Rico); 
Rafael Hernandez Airport (Aguadilla, Puerto Rico); 
Stewart International Airport (Newburgh, NY). 

General aviation airports: 

Airglades Airport (Clewiston, FL); 
Brown Field Municipal Airport (San Diego, CA); 
Gwinnett County Airport-Briscoe Field (Lawrenceville, GA); 
New Orleans Lakefront Airport (New Orleans, LA); 
Niagara Falls International Airport (Niagara Falls, NY). 

Source: GAO analysis of FAA data. GAO-15-42. 

Notes: Boardings shown are for calendar year 2013. General aviation 
airports generally do not have scheduled commercial service and have 
less than 2,500 boardings a year. Niagara Falls International Airport 
was classified as a joint-use military and general aviation reliever 
airport at the time it was in the APPP. The airport is now classified 
as a commercial service airport and had 99,958 boardings in calendar 
year 2013. 

[End of figure] 

Larger commercial service airport sponsors sought full privatization 
through the APPP to use lease proceeds for non-airport purposes and to 
improve operations. The City of Chicago, for example, sought to obtain 
proceeds from a long-term lease of Midway to help meet the city's $9 
billion unfunded pension liability. After securing state legislation 
to extend the airport's exemption from property taxes to a potential 
private-sector airport operator, among other things, the City 
committed to using the net proceeds from privatization for airport 
infrastructure projects or to fund city pensions.[Footnote 34] 
According to the Puerto Rico Ports Authority (PRPA), the public-sector 
owner of Luis Munoz Marin (as well as the operator of several other 
aviation facilities and the owner or operator of several non-aviation 
facilities), PRPA needed immediate debt relief, improved airport 
operations, and substantial infrastructure improvements for the 
airport. Notably, when the PRPA applied to privatize Luis Munoz Marin 
in 2009, the Authority carried more than $800 million of debt and 
wanted to apply the proceeds from the long-term lease of the airport 
towards reducing that debt.[Footnote 35] The governor of New York at 
the time of Stewart International Airport's (Stewart) privatization 
identified the goals of privatization as providing the Hudson Valley 
region with better air service, increased economic development, and a 
strengthened tax base as main objectives for full privatization. The 
governor wanted to use the expertise of the private sector to develop 
the underutilized airport and surrounding real estate, which it hoped 
would result in more jobs and economic development for the region. 
[Footnote 36] 

Under the APPP, commercial service airports can only be leased. The 
financial structure of these privatizations included an upfront 
payment followed by a stream of payments over the lease term. The 
private sector bidders have proposed to finance their purchases 
through a mix of debt and equity. For example, in the case of Luis 
Munoz Marin, Aerostar, the private-sector airport operator that won 
the lease of the airport, financed $350 million of the $615 million up-
front payment by issuing bonds with a maturity of 22 years and yield 
of 5.75 percent. The investment was supplemented with $265 million in 
equity financing. One private-sector airport operator that we spoke 
with stated that the expected return on invested equity that private 
equity owners generally demand ranges between 10 and 20 percent, which 
is a higher return on equity than debt because it is unsecured and 
returns are more uncertain. Table 1 outlines the purchase and 
financing structure that include up-front equity and debt issuance for 
the three applicants that submitted final APPP applications to the FAA 
including the two completed privatizations (Stewart and Luis Munoz 
Marin), and the first privatization attempt for Midway. For the lease 
of Stewart, the bidder, National Express Group (NEG) relied on NEG 
equity funds and revolving credit for its $35 million up-front lease 
payment in 2000. In the final application for Midway's first effort, 
Midway Investment and Development Company (MidCo) stated that at least 
20 percent of the initial upfront payment would come from equity with 
the rest made up from loans and additional equity. MidCo's financial 
plan for the first Midway privatization effort depended on an 
estimated over $1.12 billion (in nominal dollars) increase in PFC 
collection authority to cover the additional costs of refinancing 
MidCo's outstanding debt, which would have been about a 45 percent 
increase over Midway's approved estimated amount of $2.5 billion in 
PFC collection authority for the same number of planned capital 
projects. To close the lease for Luis Munoz Marin, FAA required the 
PRPA to confirm the investor's ability to finance the initial lease 
amount and perform over the lease term. FAA officials stated that they 
ensured that the new private operator could secure its financing. 

Table 1: Financial Structure for the Lease Payment and Financing of 
Selected U.S. Airports That Submitted a Final Application to the APPP: 

Year: 2000; 
Airport sponsor: New York State Department of Transportation; 
Airport: Stewart; 
Up-front lease payment: $35 million; 
Financing structure: Funds from private sector operator and revolving 
credit[A]. 

Year: 2008; (proposed); 
Airport sponsor: City of Chicago; 
Airport: Midway; 
Up-front lease payment: $2.521 billion; 
Financing structure: $500 million to $1 billion in equity (20 to 40 
percent), remainder from either additional equity or loans (80 to 60 
percent)[B]. 

Year: 2013; 
Airport sponsor: Puerto Rico Ports Authority; 
Airport: Luis Munoz Marin; 
Up-front lease payment: $615 million; 
Financing structure: $350 million from debt financing of investment 
grade bonds (57 percent), $265 million from equity (43 percent). 

Source: GAO Summary of FAA Docket Information. GAO-15-42. 

[A] Information regarding distribution of debt and equity not 
available. 

[B] These numbers reflect the financing structure for the first 
privatization effort for Midway. MidCo's proposed increase in PFC 
authority would have helped to cover the additional costs of re-
financing its outstanding debt. 

[End of table] 

In contrast to large commercial service airports, smaller general 
aviation airports applied to the APPP as a means to attract capital 
improvements to expand airport operations and to increase or attract 
commercial service. For example, Niagara Frontier Transportation 
Authority's objectives for Niagara Falls International Airport were to 
develop the airport's seasonal charter service and foster regional 
service to major airport hubs.[Footnote 37] The Gwinnett County Board 
of Commissioners (Gwinnett County Airport--Briscoe Field) and the 
Board of Commissioners for the Orleans Levee District (New Orleans 
Lakefront Airport) both sought proceeds for the redevelopment of 
airport infrastructure to create more options for commercial passenger 
service or increase the quality and value of services for airport 
users in their respective locations, while Airglades Airport in Hendry 
County, Florida, is seeking to make improvements to initiate air cargo 
service at the airport. 

Two Airports Have Been Privatized under the APPP; One Application Is 
Active, and Seven Airports Left the Program for Various Reasons: 

Since the FAA started accepting applications for the APPP in 1997, two 
airports have been privatized under the APPP: Stewart and Luis Munoz 
Marin (see figure 4). These privatizations took from about 2.5 to more 
than 3 years from the initial application to completion. Stewart was 
privatized in 2000 with a 99-year lease agreement but reverted back to 
public control in 2007, leaving Luis Munoz Marin as the only remaining 
privatized airport under the APPP. Additionally, there is one active 
application currently in the APPP for Airglades Airport in Hendry 
County, Florida.[Footnote 38] In August of 2014, FAA approved a 
management contract between Hendry County and Airglades International 
Airport LLC pending Hendry County's submission of the final APPP 
application. 

Figure 4: Airport Privatization Pilot Program for Stewart (1997-2000) 
and Luis Munoz Marin (2009-2013): 
[Refer to PDF for image: illustration] 

Stewart International Airport: 

1997: 
Preliminary application filed (October 23, 1997); 
FAA notice of preliminary application status (December 16, 1997). 

1998: 
Selection of private operator (April 1998). 

1999: 
Final application filed (January 10, 1999); 
FAA notice of final application status and opening of public comment 
period (April 2, 1999); 
End of public comment period (June 7, 1999); 
Public meeting (June 12, 1999); 
Extension of public comment deadline (June 28, 1999). 

2000: 
Application approved (March 31, 2000). 

Luis Munoz Marin International Airport: 

2009: 
Preliminary application filed (December 1, 2009); 
FAA notice of preliminary application status (December 22, 2009). 

2011: 
MOU with Airlines Signed (Early 2011); 
Issue request for qualifications (July 6, 2011). 

2012: 
Selection of private operator (July 19, 2012); 
Final application filed (September 10, 2012); 
FAA notice of final application status and opening of public comment 
period (September 19, 2012); 
Public meeting (September 28, 2012); 
End of public comment period (November 19, 2012). 

2013: 
Application approved (February 25, 2013). 

Source: GAO summary of applicant information. GAO-15-42. 

[End of figure] 

* Stewart was the first commercial service airport to participate in 
the APPP, submitting its preliminary application in October 1997. The 
application process took about 2.5 years and concluded in March 2000 
with the finalization of the lease to NEG. The state of New York, the 
public owner of Stewart and other airports in the state, was unable to 
attain air carrier approval to use proceeds from the long-term lease 
for non-airport use so it invested the $35 million up-front lease 
payment and future lease payments in other state-owned airports. 
[Footnote 39] Shortly before assuming the lease, NEG tried 
unsuccessfully to terminate its lease obligations because of a shift 
in its business focus. NEG was unable to sell the lease to another 
party because the lease prohibited doing so for a minimum of 5 years. 
As a result, according to the recent ACRP report on airport 
privatization, NEG focused on managing the airport for immediate 
financial return and was not interested in investing in the airport. 
[Footnote 40] In October 2007, NEG sold the remaining portion of the 
99-year lease to the PANYNJ for $78.5 million, putting the airport 
under public sector management once again. The PANYNJ later contracted 
management of the airport to AvPorts; however, PANYNJ still holds the 
airport's Part 139 certificate. 

* Luis Munoz Marin was privatized in 2013 after a little more than 3 
years in the APPP. Public stakeholders included the public airport 
owner (PRPA), the Puerto Rico Public-Private Partnership Authority, 
and the Puerto Rico Government Development Bank. A study prepared by 
the Puerto Rico Public-Private Partnerships Authority and PRPA 
determined that privatization should increase airport capital 
investments, revenue generation, and cost controls while also 
minimizing risk to the public sector through protection of the public 
sector interests.[Footnote 41] The study noted that the airport's 
performance lagged behind other Caribbean counterparts in total 
passenger growth, boardings had decreased, aviation operational 
financial performance had been flat over the past 3 years, and the 
credit profile of PRPA had been scrutinized by Moody's and S&P. These 
factors, according to the study, contributed to the desirability of 
privatization. Aerostar paid $615 million up-front to PRPA and will 
pay an additional estimated $600 million through revenue sharing over 
the 40-year term of the lease. 

Seven applicants to the APPP left the program before the airport was 
privatized.[Footnote 42] Niagara Frontier Transportation Authority 
(Niagara Falls International Airport) withdrew after failing to re-
submit its final application in response to FAA's concerns that the 
application and lease did not comply with the intent and some specific 
requirements of the APPP. The Orleans Levee District's application for 
New Orleans Lakefront Airport was terminated due to a shift in 
sponsorship of the airport property removing the District's ability to 
sell the airport. PRPA withdrew its application for Rafael Hernandez 
Airport and instead decided to develop the airport without a private 
operator.[Footnote 43] Four of the seven withdrew their applications 
due to reduced financial stability of the proposed private sector 
owner/operator or other financial concerns. For example, the City of 
Chicago withdrew Midway's final application for its first 
privatization effort after it was submitted to the FAA for approval 
because the selected private-sector operating consortium could not 
complete its financing plan. The New Orleans Aviation Board withdrew 
Louis Armstrong International's preliminary application after analysis 
of market conditions indicated that New Orleans was not well-
positioned to solicit bids for the program. Along with financial 
concerns, community opposition or a shift in political support have 
also played a role in decisions to withdraw. Privatization efforts for 
both Brown Field Municipal Airport and Gwinnett County Airport Briscoe 
Field faced community opposition due to air traffic and financial and 
economic concerns respectively that shifted political support against 
privatization. Officials for Gwinnett County, the public sector owners 
of Briscoe Field, were concerned with, among other things, financial 
risks associated with a potential default of the private investor, 
commitment to contracts and leases without expressed interest from 
airline carriers, and the financial burden placed on the public sector 
to complete the proposed infrastructure improvements.[Footnote 44] 

Privatization outside the APPP Is Also Rare: 

Private ownership or operation of domestic commercial service airports 
outside of the APPP is also rare. Only one commercial service airport 
in the United States was privately developed and is privately 
operated--Branson Airport in Branson, Missouri. Branson Airport's 
operator, Branson Airport LLC, chose not to participate in the APPP 
and developed the airport with financing from $60 million in private 
investment and $114 million in tax-exempt bonds.[Footnote 45] The 
Branson Regional Airport Transportation Development District issued 
the tax-exempt bonds as Private Activity Bonds. Building this new 
airport took 22 months, with construction beginning in 2007. Although 
privately developed and operated, Branson Airport LLC holds a long-
term lease agreement with Taney County, MO, for the airport land and 
the airport collects $8.24 from the City of Branson for every 
passenger that flies into Branson Airport, to support tourism in 
Branson and the surrounding area. Branson Airport LLC chose not to 
participate in the AIP program because taking AIP grants would subject 
them to grant obligations--among them economic nondiscrimination 
requirements. Without these obligations, Branson Airport LLC has the 
flexibility to optimize returns and can negotiate different landing 
charges with different airlines that serve the airport. However, 
passengers that fly to or from Branson Airport still pay federal 
ticket taxes into the Airport and Airway Trust Fund which funds AIP 
grants, even though Branson Airport LLC has not chosen to receive any 
AIP grants. Branson Airport, like any airport, is also susceptible to 
shifts in passenger traffic. While a Branson Airport LLC 
representative stated that the airport has had 1.1 million passengers 
in its first 5 years of operation, in recent years, passenger traffic 
at Branson has declined and Branson Airport LLC has entered into a 
forbearance and funding agreement with the bondholders' trustee. 

FAA Assists in the Application Process but Does Not Promote Airport 
Sponsor's Participation in the APPP: 

FAA administers the APPP program but does not actively seek 
applicants.[Footnote 46] FAA reviews applications, provides guidance 
and technical assistance, facilitates communications among 
stakeholders throughout the application process, and, according to 
FAA, routinely makes information about the program available through 
its public website and presentations.[Footnote 47] Technical 
assistance focuses on guidance for completing an application that 
adheres to the provisions set forth by FAA. FAA staff have also 
provided technical assistance to applicants in submitting an accurate 
map of all airport properties that would be transferred to the private-
sector airport operator. FAA staff also review airport lease 
agreements between the public sponsor and private operator to ensure 
that the proposed lease complies with federal laws and regulations. 
FAA headquarters and regional staff stated that after providing 
applicants with written acceptance of their preliminary application, 
staff educated bidders and public-sector airport owners about the APPP 
process and provided technical assistance. 

Under authority delegated by the Secretary, included in administration 
of the pilot program, the FAA Administrator is also responsible for 
approving certain exemptions to waive grant repayment and to allow 
revenue diversion from the sale or lease of the airport.[Footnote 48] 
Based on review of the sponsor's application and proposal, the FAA 
Administrator decides which exemptions, if any, should be granted 
based on an established list of considerations.[Footnote 49] For 
example, at Luis Munoz Marin, the FAA Administrator waived about $49 
million in grant repayment for the PRPA because Luis Munoz Marin would 
continue to function as a public airport and all AIP-funded facilities 
and improvements would continue to be used for the purposes of the 
original AIP grant.[Footnote 50] The FAA Administrator granted 
approval of the PRPA's use of lease proceeds for general purposes 
since the request had been approved by more than 65 percent of air 
carriers and since funds used for debt reduction would allow PRPA to 
make future investments in both ports and regional airports.[Footnote 
51] Similarly, about $59 million in grant repayment was waived for 
Stewart because the airport would continue to function as a public 
airport and AIP grant-funded facilities would maintain use for the 
purposes of the original grant. For Midway, FAA officials estimated 
that about $145 million would have been waived if the privatization 
had been finalized and a full waiver of grant repayment had been made. 
[Footnote 52] 

Several Factors Limit Demand for Privatization, yet the Potential 
Benefits of Private Investment and Expertise Can Be Achieved without 
Relinquishing Airport Control: 

Financial Considerations Can Reduce Demand for Privatizing U.S. 
Airports despite APPP: 

Financial considerations reduce both public and private sector demand 
for privatizing airports in the U.S. as demonstrated by only two 
airports successfully completing the privatization process under the 
APPP since 1997.[Footnote 53] Fundamentally, for an airport 
privatization to occur, the private operator must be able to make a 
profit and the public-sector airport owner must believe that more will 
be gained than lost in the transaction. The first key consideration to 
private-sector airport operators and investors is their generally 
higher borrowing costs than the public-sector airport owner due to the 
private sector's inability to issue tax-exempt bonds. For example, an 
airport privatization expert we spoke with stated that one obstacle 
barring more airport privatization is the private-sector airport 
operator's lack of access to tax-exempt bond financing increasing the 
borrowing costs when compared to public-sector airport owners. In 
addition, representatives from a financial institution we spoke with 
said that public-sector airport owners have the access they need to 
finance their capital investments with tax-exempt bonds. Even though 
there has recently been a narrowing in the differential in interest 
rates between tax-exempt and taxable bonds, prospective private sector 
airport owners may still find it difficult to gain sufficient 
operational efficiencies upon privatization to overcome the higher 
costs of financing they face compared to public-sector airport owners. 
A recent report by the House of Representatives, Committee on 
Transportation and Infrastructure's Special Panel on Public-Private 
Partnerships found that one major reason why the U.S. public-private 
partnership market has not grown as quickly as in other countries is 
that those countries do not offer tax-exempt municipal bonds. The 
Panel found that the U.S. posses a robust municipal bond market of 
approximately $3.7 trillion, of which a significant portion is for 
infrastructure financing, is one major reason why the potential for 
public-private partnerships in the United States is limited. The Panel 
also found that given the private sector's higher cost of capital, 
airport public-private partnerships will only work in certain 
circumstances, usually involving budget constraints or airports that 
have historically not been well managed.[Footnote 54] Current Internal 
Revenue Service (IRS) regulations significantly limit the ability to 
transfer outstanding tax-exempt debt to the private sector 
operator.[Footnote 55] As a result, the airport's outstanding tax-
exempt debt must be paid off by the public-sector airport owner prior 
to a private sector transfer, leaving the private-sector airport 
operator to finance the acquisition and any future capital 
improvements with generally higher-cost taxable bonds and equity 
investments.[Footnote 56] The 2012 ACRP report on airport 
privatization also noted that the tax-favored status of U.S. public 
municipalities is a significant deterrent to full privatization. 
[Footnote 57] 

Privatized airports (within and outside the APPP) also may not be 
entitled to local and state property tax exemptions, unless 
specifically authorized, and would likely not be exempt from tort 
liability claims. In the Midway airport example, City officials had to 
negotiate with state lawmakers to maintain Midway's property tax-
exempt status and the state enabling legislation required the city to 
dedicate 90% of lease proceeds to fund capital infrastructure and 
maintenance or to fund municipal employee pension funds. According to 
the recent ACRP report on airport privatizations, with reduced 
protections for tort liability claims, privatization (within and 
outside the APPP) may create greater tort liability risk for a private 
operator than a public operator in the event of, for example, an 
aircraft accident, since the private operator would not likely be 
entitled to same immunities as a public entity.[Footnote 58] 

While increased financing and other costs have not eliminated private 
sector interest in airport privatization in the United States, those 
factors, when combined with others discussed below, have reduced the 
range of airports that may be interested in privatization. These 
factors may also help explain the lack of interest by public-sector 
airport owners in pursuing full privatization under the APPP. Further, 
until the Luis Munoz Marin privatization, there has not been an 
example of privatization in the United States for the completion of 
the full privatization process. Two industry experts we spoke with 
said that if the privatization of Midway airport had been successful, 
it could have increased the visibility of airport privatization in the 
US and demonstrated the benefits of private sector involvement. A 
successful privatization would also have to overcome any negative 
perceptions and mistrust from some in the public and local communities 
about private sector ownership of a public-use facility. 

APPP Application Process Can Be Time Consuming and Costly: 

Applicants to the APPP and other key stakeholders involved in the 
process said that the application process presented several challenges 
that added to the risks, and thus costs, of pursuing privatization. 
According to public airport owners, airport stakeholders, private 
sector investors, and the FAA, a successful transfer of airport 
control required the public owner and its team of consultants, and 
advanced-stage private sector bidders to address several challenges 
including obtaining airline consent, ensuring due diligence in 
following the FAA's application procedures, and mitigating external 
risk factors such as navigating public opinion and political scrutiny. 
This process, whether or not the application ultimately resulted in 
privatization of the airport, took significant time, ranging from 14 
to 84 months (see figure 5 below). FAA officials said that some 
airports might initially seek to structure deals to use the proceeds 
from privatization for non-airport purposes, which the FAA reviews to 
determine if the overall benefits of the deal are such that a waiver 
of the use of the proceeds for non-airport purposes is warranted. 
Therefore, FAA officials noted that the privatization process can be 
lengthy because FAA has been exercising due diligence to ensure all 
APPP rules are followed and because commercial entities take a long 
time to structure their deals. 

Figure 5: Length of Time an Applicant Was Active in the APPP, 1997-
2014 (in Months): 

[Refer to PDF for image: illustration] 

Stewart International Airport: 
1997-1999 (29 months): 
Application phase at exit: Privatized; 
Filing date of final application: Early 1999. 

Niagara Falls International Airport: 
1999-2002 (30 months): 
Application phase at exit: Final application submitted; 
Filing date of final application: Mid-2000. 

Brown Field Municipal Airport: 
1999-2001 (25 months): 
Application phase at exit: Pre-application submitted. 

Rafael Hernandez Airport: 
2000-2001 (18 months): 
Application phase at exit: Pre-application submitted. 

New Orleans Lakefront Airport: 
2001-2007 (84 months): 
Application phase at exit: Final application submitted; 
Filing date of final application: Early-2002. 

Chicago Midway International Airport[A]: 
2006-2013 (83 months): 
Application phase at exit: Final application submitted; Final 
application submitted; 
Filing date of final application: Late-2008. 

Louis Armstrong New Orleans International Airport: 
2009-2010 (14 months): 
Application phase at exit: Pre-application submitted. 

Luis Munoz Marin International Airport: 
2009-2013 (38 months): 
Application phase at exit: Privatized; 
Filing date of final application: Late-2012. 

Gwinnett County Airport - Briscoe Field: 
201-2012 (26 months): 
Application phase at exit: Pre-application submitted. 

Airglades Airport: 
2010-2014 (48 months): 
Application phase at exit: In process. 

Source: GAO summary of applicant information. GAO-15-42. 

[A] The City of Chicago terminated its lease agreement with the 
private operator in April 2009 following the private operator's 
unsuccessful attempt to secure financing. In 2011, the City submitted 
supplements to the original final application as well as an extension 
request and a revised preliminary application that was approved and 
enabled the City to complete another round of bid requests until 
spring 2013 when the City withdrew its application due to too few 
qualified bidders. 

[End of figure] 

We spoke with key public sponsor representatives of two of the three 
APPP applicants that reached the final application phase. They 
discussed the planned as well as unanticipated consequences of lengthy 
and costly application procedures, support and learning resources 
required throughout, and risk factors that increased uncertainty. 

* Lengthy airline consent negotiations--Public-sector airport owners, 
consultants, and private investors that we spoke with all said that 
obtaining the 65 percent consent from airlines to use lease or sale 
proceeds from privatizing the airport for non-airport purposes was the 
pivotal and most time-consuming requirement of the application 
process. As depicted in figure 5 above, the privatization process for 
the Luis Munoz Marin and Midway airports took a total of 38 and 83 
months, respectively. Within those time frames, it took 25 months for 
PRPA to obtain airlines' consent for Luis Munoz Marin, and a combined 
26 months for Midway's airline agreement for both privatization 
efforts. Stewart was unable to obtain airline approvals to use airport 
revenue for non-airport purposes; the airport's owner, New York, 
agreed to use the lease payments for airport purposes and to recoup 
past state investments in Stewart and other state-owned airports, in 
accordance with FAA's airport revenue use policy. For Luis Munoz Marin 
and Midway, PRPA and City of Chicago officials said that it takes 
significant time to arrive at an agreement with the airlines, then 
submit the agreement to FAA for review, and then share the agreement 
with advance-stage private bidders for bid proposals and negotiation 
purposes. Additionally, the private sector airport stakeholders and 
PRPA representatives we interviewed said that airlines' negotiations 
added an additional layer of complexity and that they believed the 
purchase transaction should be strictly between the public "seller" 
and the private "buyer." Representatives from two airlines that 
occupied the position of having dominant air traffic at Midway and 
Luis Marin Munoz airports at the time of airports' applications said 
that it could potentially be more efficient if a dominant airline 
assumed the responsibilities of coordinating the negotiation with 
other carriers. Overall, the airline representatives we spoke with 
said they were satisfied with their arrangements, while the public 
airport owners said there was extra work and time expended to get to 
an agreement with the airlines. 

* Evaluation and preparation of privatization deals by the public 
airport sponsors can be costly--Because APPP applicants must satisfy 
local, state, and federal requirements as well as potential investors, 
the process of drafting the final airport use and lease agreements 
becomes complex, requiring outside expertise. For example, the City of 
Chicago spent $13 million overall on privatization-related transaction 
costs in the first application, and $3.5 million in the second round, 
with both attempts failing to result in privatization. The Puerto Rico 
Public-Private Partnerships Authority spent $17.4 million in project 
costs from December 2009 to February 2013 that included but were not 
limited to costs associated with feasibility studies, legal counsel, 
financial consulting, engineering and technical consulting, and 
personnel and operating costs and service charges.[Footnote 59] Costs 
also included the estimated statutory fee payable to the IRS as a 
result of the elimination of tax-exempt bonds attributable to the 
airport. 

* Public opposition--Public opposition to privatization can undermine 
the public-sector airport owner's interest in privatization unless the 
goals and benefits are clearly stated. The community association we 
spoke with in San Juan said that public concerns can potentially 
impact public-sector airport owners during the privatization process. 
In Chicago, two public interest groups we interviewed said that in 
their view, the first round of privatization of Chicago's Midway 
Airport was not transparent and had limited public input. A 
representative of one of those public interest groups said that the 
State of Illinois tried to remedy this when it passed enabling 
legislation for the privatization of Midway.[Footnote 60] In San Juan, 
a community association we spoke with said that there were public 
concerns about the privatization, including over the foreign ownership 
of the bidder. The FAA public docket included written public comments 
and summarized responses from PRPA on how it and Aerostar intended to 
address those concerns.[Footnote 61] The Puerto Rico Public-Private 
Partnership Authority also provided public notice about the 
privatization of Luis Munoz Marin on its web site. 

* External factors can also undermine success--External factors can 
affect the outcome for public owners and influence decision-making by 
private investors. Given the lengthy timetable for consideration, 
application, and review, changes in economic or political climates can 
influence whether a deal is consummated. 

- Macro-economy--Changes in the economy, such as the onset of a 
recession, can alter the value and outcome of a privatization of a 
deal. In the first Midway privatization effort, a lease agreement with 
a bidder was reached but failed to close, in part, because broader 
financial problems in the economy left the private bidder unable to 
secure sufficient financing. Since then, the FAA has placed greater 
scrutiny on the potential private bidders' proposed funding and 
financing and applied this lesson when reviewing the Aerostar bid for 
Luis Munoz Marin. 

- Shifting political agenda--In 1996, the city of San Diego entered 
into an agreement with a private sector developer, Brown Field 
Aviation Park LLC, to implement a comprehensive redevelopment of Brown 
Field, a general aviation reliever airport, into an air cargo hub and 
general aviation airport. After submitting a preliminary application 
to the APPP in 1999, the City withdrew from the pilot program in 2001 
due, in part, to diminishing support from elected officials and over 
concerns and opposition among the community of the potential adverse 
affects of the airport's being redeveloped into a cargo hub. Civic and 
public interest associations and airport experts we spoke with said 
that the decision to privatize municipal assets, such as airports, can 
involve a highly political decision-making process. One private-sector 
airport investor stated that political uncertainty reduces the private 
sector's willingness to invest in an airport as well. 

- Performance risks--Even after privatization occurs there is a risk 
of poor performance by the private-sector airport operator if the 
lease is not properly executed. In the case of the Stewart, as 
previously discussed in this report, NEG shifted its business focus 
from airports soon after it assumed the lease. NEG managed the airport 
for immediate financial return and was not interested in investing in 
the airport. As noted above, the airport was acquired by the PANYNJ in 
2007 after 7 years under private operation. The PANYNJ officials we 
spoke with said that the Port Authority made far greater investments 
compared to NEG to bring the airport up to Port Authority standards 
and to retain a key airport tenant. 

Public-Sector Airport Owners Can Attract Private Capital and Expertise 
without Ceding Airport Control: 

Public-sector airport owners have found ways to raise private sector 
investment in their airports and attract expertise without ceding 
control of their airports. A recent report by the House of 
Representatives, Committee on Transportation and Infrastructure's 
Special Panel on Public-Private Partnerships similarly found that 
airport owners have partnered with airlines and others for terminal 
modernization programs.[Footnote 62] Two public-sector airport owners 
we spoke with that explored but chose not to go through the APPP or 
instead sought access to private capital for projects, said they 
wanted to retain control of the airport and obtain private capital and 
airport operation and management expertise, all within a quicker 
timeframe.[Footnote 63] In addition, three private-sector airport 
stakeholders we spoke with said that public-private partnerships can 
achieve many of the same goals as full privatization.[Footnote 64] 
Furthermore, some of these private sector stakeholders said that the 
public-private partnerships take significantly less time than 
undergoing full privatization because such partnerships involves fewer 
parties and less outside review. The following examples of different 
types of private activity at major commercial service airports 
demonstrate that many of the benefits of full privatization can be 
achieved without ceding airport control. 

* Gary International Airport management and development contracts--The 
City of Gary, Indiana, wanted to expand Gary International Airport, 
improve its management, and seek economic development in the 
community, without relinquishing municipal control to a private 
operator.[Footnote 65] In January 2014, the Gary/Chicago International 
Airports Authority entered into public-private partnership that 
includes a 10-year management contract (with up to 30 years of 
extension) with private operator AvPorts and a multi-year development 
agreement with a related development firm, AFCO, to outsource both 
airport operations and to spur economic development on and around the 
airport. Both the Gary City officials and the private operator 
representatives said that the process took less than one year and was 
a positive collaborative effort that allowed each party to take 
advantage of specific benefits, and both said that a full 
privatization would have been a complex, lengthy process and limited 
these outcomes. 

* LaGuardia International Airport terminal developer contract--The 
PANYNJ sought bids for the redevelopment of the airport's current 
central terminal from October 26, 2012, through January 25, 2013. 
[Footnote 66] According to a Port Authority official, the PANYNJ 
lacked sufficient financing to undertake the project on its own as it 
would have taken too much time to accumulate the funds to do so. 
According to the PANYNJ, the terminal project calls for a new 1.3-
million-square-foot terminal with 35 gates and will include the 
replacement and financing of the central terminal building, including 
roads, utilities, a central heating and refrigeration plant, and other 
support facilities. Additionally, the winning bidder must also work 
with the PANYNJ in operating the existing central terminal during 
construction, manage the transition of airline and non-airline tenants 
to the new facility as well as operate and maintain the plant and the 
terminal building for a specified term. The private sector investors 
will receive a portion of the central terminal building's revenue in 
return for their investment. Presently, the PANYNJ has narrowed the 
bidder to three prequalified teams. 

* Detroit Metropolitan Airport, McNamara Terminal--This $1.2 billion 
terminal project was completed in 2002 and included 97 gates, baggage 
area, parking garage, an indoor tram, and shops and restaurants. The 
project was financed through a public-private partnership between 
Northwest Airlines and the airport sponsor, Wayne County, with a major 
portion of the project funded through PFC revenues and associated 
airside projects funded through AIP grants. The airline acted as the 
developer and general contractor of the project, and continues to 
operate it today. Wayne County retains ownership rights to the 
terminal. 

* Indianapolis International Airport management contract--As reported 
by ACRP, in the 1990's, the mayor of Indianapolis pursued 
privatization as a way to address pension funding deficits, meet 
unfunded infrastructure needs, and provide jobs and attract economic 
development. The Indianapolis Airport Authority (IAA), the public 
sector airport owner, considered full sale or lease of its general 
aviation and commercial airports but decided that getting regulatory 
approval would be difficult.[Footnote 67] Therefore, the IAA entered a 
10-year management contract with British Airports Authority (BAA) to 
manage its system of general aviation airports and Indianapolis 
International Airport. BAA contracted to manage the airport and 
attract new airline service, increase nonairline revenues, reduce 
operating expenses, improve customer service, and improve the 
diversity and expertise of airport staff. The BAA earned a management 
fee annually based on how much it helped airlines save on costs per 
passenger. BAA and the Airport Authority agreed to an extension of the 
management contract to 2008, with the extension to include a major 
terminal redevelopment project. As the initial operating efficiencies 
were realized, it became difficult for BAA to obtain further financial 
returns. And as the compensation formula became unwieldy to calculate 
for both BAA and the Authority, both parties agreed to terminate the 
contract early in 2007, and the airport system was returned to public 
sector management. According to ACRP's case study of the airport, most 
airport staff were transferred back to IAA with increased and 
diversified skills and the airport system saw an increase in airline 
traffic.[Footnote 68] 

In addition, FAA officials noted that many airports have considered 
changes in ownership, governance structure, or day-to-day management 
for a broad range of reasons, including avoidance of personnel or 
procurement restrictions, lack of agility in policy-making and 
operational control. The officials noted that municipally-owned 
airports considering privatization may learn of other available 
solutions to their challenges including simple transfer to a single-
purpose airport authority. In 2009, ACRP reported that airport 
ownership transfers from general government departments to single-
purpose or limited-purpose government or private entities were on the 
rise.[Footnote 69] ACRP's recent report on airport privatization also 
suggests that a single purpose airport authority may not be attracted 
to privatizing any of its airport assets under the APPP because such 
an authority will likely not have any desire, incentive or even 
ability to transfer sale or lease proceeds from a privatization to 
general government programs outside its purview.[Footnote 70] 

Potential Effects of Airport Privatization Are Difficult to Determine: 

We found that the potential effects of airport privatization on 
airport efficiency, the Federal Airport and Airway Trust Fund, federal 
tax revenues, and airport employees and concessionaires are difficult 
to estimate.[Footnote 71] As discussed below, this difficulty is 
partly due to the lack of experience with privatization in the United 
States, as well as the wide array of potential variables that could 
affect the viability of a particular airport privatization. 

* Efficiency of airport operations--Privatization may not 
significantly affect the efficiency of U.S. airports. Fourteen of the 
42 airport stakeholders and experts we interviewed noted that one 
benefit of airport privatization tends to be greater efficiency in 
airport operations due to the private-sector airport operator's profit 
motive which contrasts with public-sector airport owners' goals that 
can compete with efficiency, such as increasing local employment or 
satisfying community or environmental concerns that may result in more 
expensive labor and procurement costs than private-sector airport 
operators may have. As a result, some of these stakeholders argue that 
a private owner may be more likely than government sponsors to find 
the greatest efficiencies in operations. However, as discussed 
earlier, there already is extensive private-sector involvement at U.S. 
airports, particularly for non-aeronautical operations, such as 
parking and food service, which are operated by private-sector vendors 
or concessionaires. Similarly, airlines and outside groups have 
invested in airport facilities, such as in new terminals, which have 
provided private sector input into the airport's management decisions 
and incentives to control costs for both the private and public 
sector. Finally, on the airside of airport facilities, private sector 
airport operators may also still be bound by the same AIP grant 
obligations that public-sector airport owners are, such as prevailing 
wage laws or Buy America provisions, thus reducing the potential 
efficiencies that may be achieved by transferring airport operations 
to the private sector. Some academic research has examined efficiency 
outcomes under various airport ownership structures and found mixed 
results as to the extent that privatization enhances the efficient 
operations of airports.[Footnote 72] 

* Federal expenditures--Airport privatization would likely have little 
or no impact on expenditures out of the Federal Airport and Airway 
Trust Fund. As stated above, airports privatized through the APPP are 
eligible for AIP grants albeit with a larger matching contribution for 
AIP discretionary grants. We reviewed capital improvement information 
that was submitted by seven airports seeking to privatize through the 
APPP, and found that all of them depended on capital investments from 
AIP apportionment grants.[Footnote 73] At the same time, the amount of 
taxes paid into the trust fund by airline passengers would not change 
if an airport privatized. Nevertheless, to the extent that privatized 
airports receive reduced AIP grants, those funds would presumably 
become part of the total available AIP grant funds provided to other 
airports, leaving the total disbursements from the trust fund 
unchanged. 

* Federal tax revenues--The extent to which an airport privatization 
would affect federal tax receipts is difficult to estimate because 
many of the determining factors are unknown. The factors that would 
determine the net effect of a full airport privatization on federal 
tax revenues include: 

- whether the government owner of the airport provides tax-exempt 
financing for the airport facilities through qualified private 
activity bonds under the privatization arrangement;[Footnote 74] 

- the type of entity the new investor is and, if it is a pass-through 
entity such as a partnership, the type of taxpayers its partners are; 
[Footnote 75] 

- the profitability of the new investor, as determined according to 
federal tax rules;[Footnote 76] 

- the extent to which the taxable incomes of independent 
concessionaires operating at the airport are affected by the 
privatization;[Footnote 77] 

- the amount of federal taxes, if any, that the investor would have 
paid on income from the alternative investment it would made if it did 
not participate in the airport privatization; and: 

- the use that the public owner makes of whatever payment it receives 
from the investor.[Footnote 78] 

It is not possible to make general predictions about these factors 
with respect to potential future privatizations. Even in the case of 
actual privatizations, little can be determined about some of these 
factors without access to the detailed financial and tax records. In 
addition, other factors, such as the best alternative investment 
available to the private investor and the use that the government 
owner makes of the payments it receives, cannot be determined. 
[Footnote 79] Nevertheless, any positive effect that a full airport 
privatization has on federal revenues is likely to be limited, unless 
the only alternative investment opportunity that the private investor 
had would be significantly less profitable than its investment in the 
airport. Nor is any full airport privatization likely to have more 
than a limited negative effect on federal revenues, unless the new 
private investor generates significant tax losses from the airport 
investment that it then uses to offset taxable income earned from 
other investments. (Current government owners of airports do not pay 
tax on any returns that they get from those investments, so federal 
revenues would only decline if the new owner, in effect, paid negative 
taxes.) Although such a result is possible, unless the investor can 
generate significant tax losses without also generating real financial 
losses, the investor would not undertake the investment for that 
purpose. 

* Airport employees and concessionaires--The effect of airport 
privatization on labor and concessionaires is also airport specific. 
While existing labor contracts cannot be abrogated or modified by an 
airport privatization under the APPP, the public sector airport owner 
may add other labor or concessionaire protections.[Footnote 80] For 
example, the private sector operator selected under the first 
privatization attempt of Midway was required to adhere to Chicago's 
disadvantaged business and prevailing wage requirements, and for the 
second privatization attempt, City of Chicago officials stated that 
while the APPP did not require it, every city employee at Midway would 
have a position with similar employment terms and conditions at either 
the new operator's company or the city. In addition, while all of the 
Puerto Rico Ports Authority employees at Luis Marin Munoz were 
interviewed for jobs with Aerostar, according to Aerostar 
representatives, Aerostar was not required by either the APPP or the 
terms of the agreement with PRPA to re-hire those employees. Many PRPA 
employees at the airport chose to stay with the PRPA. For example, out 
of the 400 employees from the managerial staff, only about 15 accepted 
jobs with Aerostar. Union officials we spoke with who represent the 
managerial staff affected stated that so few accepted Aerostar's offer 
because they did not know what their jobs were going to be and 
therefore chose either to remain with PRPA or to retire. Existing 
concessionaires may also be affected by privatization. We spoke with 
two concessionaires at Luis Munoz Marin who believe that the new 
airport operator is infringing their long-standing concession 
agreements, and they are currently trying to resolve their disputes 
with PRPA and Aerostar. 

Airport Privatization Is More Prevalent in Other Countries and 
Stakeholders' Views on Privatization Vary Widely: 

Different Airport Ownership Structures, Motivations, and Financing 
Drives Airport Privatization in Other Countries: 

There are several reasons why privatized airports are more prevalent 
in other countries than in the United States. At least 450 airports 
around the world have some form of private-sector participation in 
their management or ownership.[Footnote 81] First, in several 
countries the national government built, owned and operated the 
country's airports prior to privatization. The International Civil 
Aviation Organization (ICAO) has examined the efforts of 25 countries 
to privatize their airports. Prior to privatization, the national 
government in 19 of those 25 countries owned all or most of the major 
airports in those countries. National ownership of airports allows the 
central government to direct the sale of their airports and can make 
for a more streamlined privatization transaction, reducing transaction 
costs for both the public-sector owner and private-sector bidders. For 
example, seven private-sector airport stakeholders we interviewed 
stated that international airport privatization transactions have 
tended to involve the seller (such as the national government) and 
prospective buyers with no other stakeholder involvement (such as 
local governments, airlines, labor, etc.). In contrast, as we have 
noted above and as Congressional Research Service (CRS) has reported, 
U.S. airport privatization transactions involve four major 
stakeholders (public-sector airport owners, private sector investors, 
airlines and the federal government), each representing different and 
often competing interests in an airport privatization. This adds a 
complexity that is generally not present elsewhere. 

Second, foreign governments may be more motivated to privatize their 
airports than U.S. public sector airport owners may. According to 
ICAO, the reasons these governments had for privatizing their airports 
varied, including need for private sector capital investments in 
existing or new airports and a national move toward privatization of 
public assets or companies. For example, the government of the United 
Kingdom privatized the airports it owned in 1987 as part of a larger 
program of de-nationalization of nationally-owned industries and 
utilities. More recently, the national government of Brazil privatized 
several major airports to secure private sector investments in those 
airports prior to the 2014 World Cup and 2016 Olympics. In contrast, 
only Ronald Reagan Washington National Airport and Washington Dulles 
International Airport are owned by the federal government, with the 
rest owned by state, regional, or local governments--making a national 
decision to privatize U.S. airports much more unlikely.[Footnote 82] 

Third, airports in other countries have less access to public funds or 
tax subsidies than publicly-owned and operated U.S. airports, making 
them more reliant on private financing for airport improvements. As we 
have noted above, a key consideration for U.S. airport privatization 
is the loss of some AIP funds and the loss of easy access to tax-
exempt financing. For example, the House Transportation and 
Infrastructure Committee's Panel Report found that a major reason why 
public-private partnerships were more common overseas was due to the 
lack of access to tax-exempt financing that exists in the United 
States. Since the owners of foreign airports generally do not have 
these financial advantages, they do not have to account for their loss 
when privatizing and, according to CRS, would not necessarily have 
greater capital costs if they were to privatize.[Footnote 83] 

Stakeholders Provided a Wide Variety of Views on Lessons Learned from 
U.S. and Foreign Airport Privatizations: 

To address some of the challenges to airport privatization that we 
identified, such as the length of time and complexity of negotiations, 
31 of the 42 airport stakeholders and experts we interviewed provided 
a wide variety of insights from their experiences with both 
international and U.S. airport privatizations and cited various 
lessons learned.[Footnote 84] See appendix II for the full list of the 
lessons learned mentioned by stakeholders. The three lessons learned 
most frequently mentioned were: 

* Ensure that the public-sector airport owner conducts due diligence 
prior to privatization--To varying degrees, nine stakeholders stated 
that the public sector airport owner should ensure that it establishes 
goals for privatizing the airport, know the value of the airport, and 
understand the process for privatizing the airport. The privatization 
effort may be jeopardized if these activities are not completed prior 
to starting the privatization effort. For example, according to one 
private-sector airport consultant we interviewed, public officials at 
one airport the consultant was familiar with decided to privatize 
without knowing what privatization would entail, what they wanted to 
achieve from privatization, and how much the airport was worth by 
obtaining an independent evaluation of the airport's value. As a 
result, the public-sector airport owners decided that the private 
sector response to their request for qualified operators was 
inadequate and the airport's privatization application was withdrawn. 
In contrast, according to a private sector airport consultant and the 
officials responsible for the Luis Munoz Marin privatization and for 
the Gary airport agreements, the public airport owners at both 
airports established clear objectives, engaged consultants to 
independently determine the value of the airport, created reports 
detailing this information, and held outreach and public comment 
meetings--all of which had a positive effect on public support to 
finalize these deals. For example, the Puerto Rico Public-Private 
Partnership Authority conducted a study that was released to the 
public prior to submitting the application to the APPP outlining the 
options for Luis Munoz Marin and that showed the reasons why Puerto 
Rico should privatize that airport.[Footnote 85] 

* Create a transparent privatization process--Seven stakeholders 
suggested that public airport owners should lay out an open process 
with a schedule showing major milestones as to how their airport will 
be privatized, a process that one stakeholder stated could increase 
stakeholder acceptance of the privatization. Two of the seven 
stakeholders, who were representatives from public interest groups we 
interviewed, stated that a transparent process can help ensure that 
the local community's interests are protected in privatizations in 
addition to providing the public with assurance that the public sector 
owners have a plan for using the sale or lease proceeds. According to 
one private-sector airport operator we spoke with, transparency and 
clarity about how the process will affect airlines and concessionaires 
can also lead to more bidders and lower transaction costs for the 
public sector airport owner as well. For example, the Puerto Rico 
Public-Private Partnership Authority set an established process for 
privatizing any public asset held by the Commonwealth of Puerto Rico, 
and that process was followed and, as noted above, made public in the 
privatization of Luis Munoz Marin.[Footnote 86] Additionally, the City 
of Chicago added, among other things, a Midway Advisory Board and 
pledged that the City Council would have 30 days to review any 
potential privatization deal to the requirements for the second Midway 
privatization effort.[Footnote 87] 

* Involve all airport stakeholders in the privatization process--Six 
stakeholders we interviewed stated that not all airport stakeholders, 
such as airlines in foreign airport privatizations or airport labor or 
concessionaires, are consulted or involved in deciding whether to 
privatize an airport or on the structure of the airport privatization. 
For example, three airport labor and concessionaire groups we spoke 
with about the privatization of Luis Munoz Marin stated that they did 
not receive much information about the privatization of the airport 
from the Puerto Rico authorities during the process, leading them to 
oppose privatization as they did not know what was going to happen to 
their jobs or their concessions if the airport was privatized. In some 
foreign transactions one stakeholder analyzed, airlines were not 
consulted for several privatizations and charges to airlines and 
airline passengers increased. However, as previously discussed, 
several private-sector airport operators, investors, consultants, 
academic experts, and former public airport operators stated that 
airlines had too much say in the APPP privatization process. These 
stakeholders stated that negotiating with the airlines to secure their 
approval was the longest part of the privatization process. 

Stakeholders Provided Wide Variety of Views and Options for the APPP: 

Twenty-three of the 42 stakeholders and experts we interviewed offered 
a range of suggestions to change the APPP, ranging from relatively 
small changes that FAA could implement, such as increasing FAA 
involvement earlier in the process, to more substantial changes that 
would require congressional action, such as reducing or eliminating 
airline approval to use the proceeds of the privatization for non-
airport purposes. The effect that any of these changes may have on 
either the decision by public airport owners to privatize or on the 
APPP process itself, however, is unclear. CRS noted that while 
streamlining the APPP process might make privatization somewhat more 
attractive, the public sector's gains are unclear and the private 
sector's gains are limited from privatization under the APPP and major 
structural changes to the existing U.S. airport-financing system would 
be required to significantly increase interest in airport 
privatization in the U.S. 

In contrast, nineteen stakeholders we interviewed had no suggestions 
on how to change the airport privatization process in the United 
States. Two stakeholders (one whom did offer suggestions to improve 
the APPP and one who did not) did not see airport privatization as a 
solution to their airport funding or efficiency concerns. 
Representatives from one airline trade organization we interviewed 
stated that airlines are looking for airports that are cost-efficient 
while a representative from another airline trade organization viewed 
privatization as a solution to a non-existent problem. One public 
sector airport owner also stated that an increase in the federal PFC 
cap could provide as much capital investment as the amount of private 
capital that could come with privatization. See appendix III for a 
full list of the options mentioned by stakeholders we interviewed. 
Some of the most common recommendations mentioned by stakeholders 
included: 

* Change the airline approval requirement in the APPP--Ten 
stakeholders we interviewed stated that the requirement to gain 
approval from the airlines serving an airport being privatized should 
be modified. Two stakeholders cited that this approval process is the 
longest part of the current privatization process, necessitating 
consultation with the airlines for any significant changes to the 
lease agreement. One private-sector airport stakeholder who suggested 
that this requirement should be changed noted that public-sector 
airport owners are able to negotiate other commercial deals without 
airline approval. The stakeholder stated that even absent the airline 
approval requirement in the APPP, the FAA would still have the 
authority to regulate aeronautical rates and charges through their AIP 
grant assurances. In addition, the requirement possibly reduces of the 
value of the deal as airlines have sought concessions to secure their 
approval. However, outside of these 10 stakeholders, all four of the 
airline stakeholders we interviewed stated that the airline approval 
requirement should be kept, as it provides the airlines meaningful 
input into the privatization deal to ensure balance between the 
airlines and the private-sector airport operators and is a critical to 
a successful privatization deal. 

* Reduce uncertainty and increase the clarity of federal rules--Five 
public and private sector stakeholders mentioned that the APPP process 
could be improved by having the FAA more involved earlier in the 
privatization process, mainly to educate the public sector airport 
owner seeking to privatize the airport. As mentioned above, the FAA is 
responsible for reviewing applications from public sector airport 
owners looking to privatize through the APPP. However, representatives 
of an airport consultants' trade group we interviewed noted that 
without more information during the decision to privatize, public 
sector airport owners may not have all the information needed prior to 
going through the APPP process, a lack that may have led some airport 
owners to withdraw from the program. FAA officials stated that in 
light of their early APPP experience, they are becoming more proactive 
with public sector airport owners to let them know what can be 
expected from the process. One public-sector airport owner we spoke 
with stated that the Department of Transportation (DOT) and FAA need 
to communicate more clearly on the criteria used to review the request 
to waive repayment of federal grants and that they should provide 
early response on that decision. One private-sector airport investor 
stated that private-sector investors look for certainty and reduced 
risk and look to invest in airports in countries that, among other 
things, have clear regulations. More communication and earlier waiver 
decisions could reduce uncertainty surrounding the privatization 
process. FAA officials stated that they strive to provide key 
decisions in a timely manner based on the information they receive in 
the APPP applications. 

* Reduce federal involvement in airport privatizations--Four airport 
stakeholders we interviewed stated that FAA involvement in airport 
privatizations could be reduced to encourage more privatizations. One 
private-sector airport stakeholder stated that the APPP has too many 
regulations and disincentives for public-sector airport owners to go 
through the process and that the length of the process serves as a 
deterrent to private investors who may not want to wait several years 
to invest their funds and can make investments elsewhere. Two of the 
four stakeholders mentioned that eliminating the APPP requirements 
would let the market determine the best deal for the airport. Three of 
the four stakeholders also stated that an automatic waiver of the 
requirement to return federal funds from a privatized airport would 
eliminate the uncertainty of whether the Secretary would grant a 
waiver during the APPP process. Under these various suggestions, the 
FAA would still have some degree of oversight because it would still 
review the transfer of the airport's operating certificate to a 
qualified operator and have regulatory authority over aeronautical 
rates and charges under the AIP grant agreements, but otherwise, the 
FAA would not have responsibility for approving the sale or lease. 
[Footnote 88] 

Concluding Observations: 

Privatization has the potential to provide additional investment in 
airports, to ease constrained local budgets and to share with the 
private sector the financial and operational risks of running an 
airport in today's challenging air travel market. However, the current 
structure and financing of airports in the United States, in 
conjunction with the current privatization process, reduce the 
incentives and value of privatization while increasing costs and risks 
for both public-sector airport owners and private-sector investors. 
The result has been a small number of applications and the even 
smaller number of resulting airport privatizations in the APPP's 18-
year existence. The privatization of San Juan's Luis Munoz Marin 
International Airport demonstrates that privatization can occur in the 
U.S. if both the public and private sectors see that the benefits 
outweigh the costs. Meanwhile, instead of privatization under the 
APPP, many public-sector airport owners have engaged the private 
sector through a variety of partnerships ranging from management 
contracts to development agreements to help reduce costs, improve 
services, and obtain capital investment without transferring airport 
control. While privatization may be an option for those public-sector 
airport owners that determine the potential benefits outweigh the 
costs, the current structure of the U.S. airport system provides for a 
broad range of private-sector participation making full privatization 
less likely. 

Agency Comments: 

We provided a draft of this report to DOT for its review and comment. 
DOT provided comments in an email that emphasized that privatization 
can in certain circumstances provide financial benefits to the airport 
sponsor and broader economic development to the surrounding community, 
if the new operator is willing to make investments in the airport that 
the public sponsor cannot. DOT also provided technical comments which 
we incorporated as appropriate. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to the 
appropriate congressional committees, the Secretary of Transportation 
and other interested parties. In addition, the report will be 
available at no charge on GAO's website at [hyperlink, 
http://www.gao.gov]. 

If you or members of your staff have questions about this report, 
please contact me at (202) 512-2834 or dillinghamg@gao.gov. Contact 
point for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. Major contributors to 
this report are listed in appendix IV. 

Sincerely yours, 

Signed by: 

Gerald L. Dillingham: 
Director, Physical Infrastructure Issues: 

List of Addressees: 

The Honorable John D. Rockefeller IV: 
Chairman: 
Committee on Commerce, Science, and Transportation: 
United States Senate: 

The Honorable Bill Shuster: 
Chairman: 
Committee on Transportation and Infrastructure: 
House of Representatives: 

The Honorable Patty Murray: 
Chairman: 
The Honorable Susan Collins: 
Ranking Member: 
Subcommittee on Transportation, Housing and Urban Development, and 
Related Agencies: 
Committee on Appropriations: 
United States Senate: 

The Honorable Frank A. LoBiondo: 
Chairman: 
The Honorable Rick Larsen: 
Ranking Member: 
Subcommittee on Aviation: 
Committee on Transportation and Infrastructure: 
House of Representatives: 

The Honorable Tom Latham: 
Chairman: 
The Honorable Ed Pastor: 
Ranking Member: 
Subcommittee on Transportation, Housing and Urban Development, and 
Related Agencies: 
Committee on Appropriations: 
House of Representatives: 

The Honorable Richard Durbin: 
United States Senate: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

The objectives of this report were to examine (1) the experience with 
the APPP since inception; (2) the challenges airport owners and 
investors face when seeking to privatize U.S. airports within and 
outside the APPP; (3) the potential effects of airport privatization; 
and (4) the lessons that can be learned from U.S. and international 
airports that have been privatized. 

To describe the experience with the APPP since its inception in 
September 1997, we reviewed all 10 airport applications in the FAA's 
APPP docket and populated a data collection instrument to identify 
applicants' goals and plans for privatizing their airport as well as 
rationale for their withdrawal from the pilot program. We used this 
information to summarize the typical pilot program application process 
and roles of public-sector airport owners, airlines, private sector 
investors and operators and the FAA. We also reviewed documents in 
FAA's dockets for each APPP application and FAA's APPP applications 
procedures, as well as interviewed FAA officials to determine their 
participation and that of public airport owners who applied to the 
APPP from 1997 to the conclusion of our audit work in November 2014. 
We reviewed the legal history of the APPP including the original 
legislation creating the program and the 2012 FAA reauthorization law 
that modified the program. We interviewed airport stakeholders such as 
city or municipal government airport owners, airport concessionaires, 
airport labor representatives, local community public-interest and 
business groups, and air carriers, and private sector airport 
operators and investors about their roles and responsibilities during 
their APPP experience. We selected these stakeholders based on our 
review of the public docket documents for applicants to the APPP, our 
prior work on airports, and the stakeholders' work on U.S. or foreign 
airport privatizations. The results of these interviews are not 
generalizable. 

We also interviewed key officials in FAA's headquarters, Great Lakes 
Region, and Southern Region offices that oversaw the application 
process for Luis Munoz Marin International Airport (Luis Munoz Marin) 
in San Juan PR; Chicago Midway International Airport (Midway) in 
Chicago, IL; and Airglades Airport in Hendry County, FL; as well as 
Gary-Chicago Airport in Gary, IN; and Branson Airport in Branson, MO; 
that chose not to apply to the APPP. We conducted site visits to 
Chicago, Illinois, and San Juan, Puerto Rico, to interview FAA and 
local community and airport stakeholders for the Midway and the Luis 
Munoz Marin APPP applications and processes. We selected these two 
sites as they were the largest airports to have submitted final 
applications to the APPP, with Midway remaining under public sector 
operation while San Juan Luis Munoz Marin transferring to the private 
sector. We spoke with 42 airport stakeholders (including public sector 
airport owners; private-sector airport investors, consultants and 
operators; the FAA; and airlines, among others) and academic and other 
experts concerning the APPP. We identified these stakeholders from the 
APPP docket documents and interviews with FAA officials and our prior 
work on airports and the air transport industry. The results of these 
interviews are not generalizable. 

To determine challenges to airport privatization, we conducted a 
statutory review of potential challenges or obstacles that could 
result from federal restrictions on use of airport sales proceeds and 
airport-purchase financing structures imposed on municipal sponsors 
and private investors that enter privatization transactions both 
within and outside the pilot program. We reviewed our 1996 report on 
issues concerning airport privatization to serve as a baseline for 
determining how the APPP addressed those issues since then. We 
conducted interviews with FAA headquarters and regional officials; 
municipal and public airport authorities that own and operate 
commercial service airports; airlines; private sector airport 
operators and investors; private-sector airport privatization 
consultants, airport operators and investors, academic experts, and 
bond-rating agencies. For challenges within the FAA pilot program, we 
conducted semi-structured interviews with pilot program applicants and 
their consultants and potential private partners to identify 
challenges, costs, and obstacles throughout the process and how they 
were addressed. The results of these interviews are not generalizable. 

To examine the possible influence of privatization on airport 
efficiency, we interviewed a variety of knowledgeable stakeholders and 
also reviewed some academic work that examined this issue. The results 
of these interviews with knowledgeable stakeholders are not 
generalizable. To determine the potential impacts of airport 
privatization on Airport and Airway Trust Fund and on federal tax 
revenues, we analyzed current AIP rules and regulations and reviewed 
applicable tax law in addition to interviewing consultants and lawyers 
who worked for both the public and private sectors in airport 
privatizations under the APPP. To determine the potential impact on 
airport labor and concessionaires, we reviewed APPP documentation and 
its legal requirements and interviewed airport labor representatives 
and concessionaires in Puerto Rico about their experiences since Luis 
Munoz Marin was privatized and City of Chicago Department of Aviation 
officials as to how Midway would have been privatized. For 
perspectives on challenges and benefits of airport privatization and 
public-private partnerships outside the FAA pilot program, we 
interviewed representatives from Branson Airport, the only privately 
operated commercial service airport that did not go through the APPP 
process in the United States and Gary-Chicago Airport, whose public 
sector owners opted for private management of the airport outside of 
the APPP process as well. We also interviewed investors and 
consultants that are active in airport public-private partnerships to 
get their perspectives on the potential benefits and advantages that 
offset costs or challenges for partial privatization of commercial 
service airports in the United States. The results of these interviews 
are not generalizable. 

To identify lessons learned from airport privatization in the United 
States and countries abroad, we reviewed industry and think-tank 
reports and articles about airport privatizations and interviewed 
knowledgeable experts who have participated in airport privatizations 
around the world. In addition, we reviewed selected airports with 
similar governance and finance structures as U.S. airports to find the 
most comparable cases that had privatized in the last 20 years for 
more information about how these airports were privatized. We selected 
Frankfurt Airport in Frankfurt, Germany; Vancouver International 
Airport in Vancouver, Canada; and London Luton Airport in Luton, 
United Kingdom. We reviewed the United Nation's International Civil 
Aviation Organization's country reports on airport and air navigation 
service privatization reports for 25 countries to determine basic 
elements of airport privatization initiatives around the world as well 
as ACRP's and CRS's recent reports on airport privatization in the U.S. 

Out of the 42 total stakeholders we interviewed (see table 1 below), 
31 (airport stakeholders from the FAA, public-sector airport owners, 
airlines, and private-sector airport owners, operators and 
consultants) mentioned lessons learned from airport privatization in 
the United States or abroad.[Footnote 89] Twenty-three stakeholders 
and experts out of the 42 interviewed offered suggestions about how to 
improve the APPP. We interviewed the airports' municipal sponsor, 
private operator, and representatives from an air carrier and 
community associations in Chicago and the municipal sponsor, private 
operator, an air carrier, concessionaires, and a labor and a community 
group in San Juan to gather information about the privatization 
process under the pilot program including lessons learned that lead to 
the success and withdrawal of the applications (respectively). In San 
Juan, we also interviewed the stakeholders about the preliminary 
results and impacts of the transition from a public to private 
operator for Luis Munoz Marin. The results of these interviews are not 
generalizable. 

We conducted this performance audit from January 2014 to November 2014 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Table 2: Airport Privatization Stakeholders GAO Interviewed: 

Federal agencies: 

Congressional Research Service; 
Federal Aviation Administration; 

Academic researchers and third party experts: 

Jonathan Gifford, George Mason University Center for 
Transportation Public-Private Partnership Policy; 
Robert Poole, Reason Foundation; 
Greg Principato, Former President of Airports Council 
International - North America; 

Financial institutions: 

Moody's Investor Services; 
Standard & Poor's; 
Raymond James & Associates; 

Industry associations: 

Airlines for America; 
Association of American Airport Executives; 
Airport Council International; 
Airport Consultants Council; 
International Air Transport Association; 

Airport owners: 

Puerto Rico Ports Authority; 
City of Chicago; 
Branson Airport LLC; 
Gary Chicago Airport Authority; 
Port Authority of New York and New Jersey; 

Private sector airport stakeholders: 

Aeroports de Paris; 
Aerostar; 
AvPorts; 
ADC & HAS; 
Kimley-Horn and Associates, Inc; 
MacQuarie Infrastructure; 

Global Infrastructure Partners: 

Propeller Investments; 
Leigh Fisher; 
Vantage Airports; 
Frasca Consultants; 
Southwest Airlines; 
Jet Blue Airlines; 
Highstar Capital; 
Mayer Brown; 
William Blair Company; 
Parsons Brinkerhoff; 

Other airport stakeholders: 

Caribbean Airport Facility; 
Civic Federation of Chicago; 
Puerto Rico Bankers Association; 
Puerto Rico Ports Authority Managerial Employees Association; 
Puerto Rico Public Private Partnership Authority; 
Trans Ad; 
United States Public Interest Research Group; 

Source: GAO. GAO-15-42. 

[End of table] 

[End of section] 

Appendix II: Airport Privatization Lessons Learned Offered by 
Stakeholders Interviewed: 

Thirty-one airport stakeholders and experts offered lessons learned 
from prior airport privatizations out of a total of 42 stakeholders 
and experts interviewed. Some stakeholders and experts offered more 
than one lesson learned. Eleven stakeholders and experts we 
interviewed did not offer any lessons learned. 

Table 3: Lessons Learned Offered by Stakeholders Interviewed: 

Lesson learned: Ensure public sector due diligence and protect the 
public interest; 
Times mentioned: 9. 

Lesson learned: Create a transparent process or a defined schedule; 
Times mentioned: 7. 

Lesson learned: Involve all stakeholders in process; 
Times mentioned: 6. 

Lesson learned: Pre-planning with airline partners; 
Times mentioned: 4. 

Lesson learned: Ensure private sector due diligence; 
Times mentioned: 3. 

Lesson learned: Ensure financial capacity of bidder; 
Times mentioned: 2. 

Lesson learned: Determining who owns what and what the benefits are; 
Times mentioned: 2. 

Lesson learned: Early or good coordination with FAA; 
Times mentioned: 2. 

Lesson learned: Obtain public comments and address them; 
Times mentioned: 2. 

Lesson learned: Characterize transaction as a public-private 
partnership not a privatization; 
Times mentioned: 2. 

Lesson learned: Ensure public and private incentives are aligned during 
lease; 
Times mentioned: 2. 

Lesson learned: Privatization can happen in the US when price and costs 
are right for private sector; 
Times mentioned: 2. 

Lesson learned: Educate public and private sector about privatization 
process; 
Times mentioned: 1. 

Lesson learned: Do not go out with indicative bids too early in the 
process; 
Times mentioned: 1. 

Lesson learned: Be aware of the costs (financial and political); 
Times mentioned: 1. 

Lesson learned: Determine clear policy goals for privatization; 
Times mentioned: 1. 

Lesson learned: Need strong political will to get it done; 
Times mentioned: 1. 

Lesson learned: Have more clarity in FAA regulations; 
Times mentioned: 1. 

Lesson learned: Write clear, prescriptive request for qualifications/
request for proposals; 
Times mentioned: 1. 

Lesson learned: Determine who has oversight of public-private 
partnership before the deal is executed; 
Times mentioned: 1. 

Lesson learned: Have a third party public agency responsible for 
privatizing the asset; 
Times mentioned: 1. 

Lesson learned: Ensure bidders are serious with minimal hurdles to 
bidding; 
Times mentioned: 1. 

Lesson learned: Have one FAA regional point of contact; 
Times mentioned: 1. 

Lesson learned: Include bidders earlier in the negotiation process with 
airlines use agreement; 
Times mentioned: 1. 

Lesson learned: Do not look to prior privatization deals too much in 
structuring another airport privatization deal; 
Times mentioned: 1. 

Lesson learned: Private airports should be built outside of the APPP; 
Times mentioned: 1. 

Lesson learned: Good communication between public and private sectors; 
Times mentioned: 1. 

Lesson learned: Long-term lease incentivizes the private sector to 
invest in airport, even outside the APPP; 
Times mentioned: 1. 

Lesson learned: Determine a sound methodology for evaluating airport 
value; 
Times mentioned: 1. 

Lesson learned: Establish better communications and public education 
process; 
Times mentioned: 1. 

Lesson learned: Build in time for public review of agreement; 
Times mentioned: 1. 

Source: GAO analysis of stakeholder interviews. GAO-15-42. 

[End of table] 

[End of section] 

Appendix III: APPP Improvements Mentioned by Stakeholders Interviewed: 

Twenty-three airport stakeholders and experts offered lessons learned 
from prior airport privatizations out of a total of 42 stakeholders 
and experts interviewed. Some stakeholders and experts offered more 
than improvement to the APPP. The remaining 19 stakeholders and 
experts we interviewed did not offer any suggestions to improve the 
APPP. 

Table 4: APPP Improvements Suggested by Stakeholders Interviewed: 

APPP improvement suggested: Re-examine or change the APPP airline 
approval requirement; 
Times mentioned: 10. 

APPP improvement suggested: Reduce uncertainty/increase clarity in 
federal rules; 
Times mentioned: 5. 

APPP improvement suggested: Leave the APPP airline approval 
requirement; 
Times mentioned: 4. 

APPP improvement suggested: Reduce federal involvement in airport 
privatizations; 
Times mentioned: 4. 

APPP improvement suggested: Require private sector credit-worthiness; 
Times mentioned: 2. 

APPP improvement suggested: More FAA involvement up-front in the APPP 
process, prior to bidder selection; 
Times mentioned: 2. 

APPP improvement suggested: Shorten time to complete privatization 
process; 
Times mentioned: 1. 

APPP improvement suggested: Require private sector transparency equal 
to public sector; 
Times mentioned: 1. 

APPP improvement suggested: Require private sector due diligence study 
prior to application; 
Times mentioned: 1. 

APPP improvement suggested: Allow use of AIP funds for due diligence 
study; 
Times mentioned: 1. 

APPP improvement suggested: Have a blueprint for the APPP process; 
Times mentioned: 1. 

APPP improvement suggested: Increase transparency of FAA process; 
Times mentioned: 1. 

APPP improvement suggested: Require a third party mediator for dispute 
resolution; 
Times mentioned: 1. 

APPP improvement suggested: Allow more airports to participate in the 
APPP; 
Times mentioned: 1. 

APPP improvement suggested: Introduce a federal aeronautical rate 
making methodology; 
Times mentioned: 1. 

Source: GAO analysis of stakeholder interviews. GAO-15-42. 

[End of table] 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Gerald L. Dillingham, (202) 512-2834 or dillinghamg@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, the following individuals made 
important contributions to this report Paul Aussendorf, Assistant 
Director; Amy Abramowitz; Thomas Beall; Leia Dickerson; Mya Dinh, Greg 
Hanna; David Hooper; Delwen Jones; Jennifer Kamara; Joshua Ormond; and 
James Wozny. 

[End of section] 

Footnotes: 

[1] A public-use airport is defined as a public airport or a privately-
owned airport used or intended to be used for public purposes that is 
a reliever airport; or determined by the Secretary to have at least 
2,500 passenger boardings each year and to receive scheduled passenger 
aircraft service. 49 U.S.C. § 47102(22). 

[2] We testified that FAA estimated Airport Improvement Program grants 
would average $8.5 billion per year from 2013 to 2017 and that the 
Airports Council International-North America estimated that non-AIP 
eligible capital needs would be about $4.6 billion for the same time 
period for a total estimated amount of $13.1 billion. GAO, Airport 
Funding: Aviation Industry Changes Affect Airport Development Costs 
and Financing, [hyperlink, http://www.gao.gov/products/GAO-14-658T] 
(Washington, D.C.: June 18, 2014). 

[3] GAO, Airport Privatization: Issues Related to the Sale or Lease of 
U.S. Commercial Airports, [hyperlink, 
http://www.gao.gov/products/GAO/RCED-97-3] (Washington, D.C.: Nov.7, 
1996). 

[4] Federal Aviation Reauthorization Act of 1996, Pub. L. No. 104-264, 
§ 149, 110 Stat. 3213, 3224(1996). 

[5] S.Rep. No. 113-45, at 40, accompanying the Senate Committee on 
Appropriations, Transportation and Housing and Urban Development, and 
Related Agencies Appropriations Bill, 2014, S. 1243. 

[6] The National Plan of Integrated Airport Systems (NPIAS) identifies 
these 3,330 airports as those significant to national air 
transportation and therefore eligible to receive grants under the 
FAA's Airport Improvement Program (AIP). Commercial service airports 
are publicly-owned airports that have at least 2,500 passenger 
boardings each calendar year and receive scheduled passenger service 
(49 U.S.C. 47102(7)). There are some exceptions to the broad 
generalization of public ownership. For example, general aviation 
airports, the largest category of airports, are generally defined as 
airports that do not fit any other FAA classification and include 
privately-owned, public-use airports with at least 2,500 passenger 
boardings each year. In addition, the federal government owns two 
primary hub airports, Washington-Reagan National Airport and 
Washington Dulles International Airport, which are operated under a 
long-term lease arrangement with the Metropolitan Washington Airports 
Authority. The Department of Defense also owns parts of joint-use 
airports where the airfield facilities are shared between military and 
civilian use. FAA, Report to Congress, National Plan of Integrated 
Airport Systems (NPIAS), 2013-2017 (Washington, D.C.: Sept.27, 2012). 

[7] Ch. 479, § 13(g)(1), 58 Stat. 770. In the 1940s the federal 
government created the first federal grant program to the public 
sector for capital development for airports with the creation of the 
Federal Aid Airport Program, which drew funding from the U.S. Treasury 
(Federal Airport Act of 1946, c. 251, 60 Stat. 170(1946)). 

[8] The Part 139 certificate is an airport-operating certificate that 
ensures safety in air transportation (14 C.F.R. Part 139). Airport 
owners must apply for the certificate and are assessed by a Part 139 
inspection administered by FAA. Any airport in the United States and 
related areas serving passenger-carrying operations must have a Part 
139 certificate if scheduled passenger-carrying operations are 
conducted on aircraft with more than nine passenger seats or 
unscheduled passenger-carrying operations are conducted on aircraft 
with at least 31 seats (14 C.F.R. § 139.1(a)(1)and (2)). 

[9] Airport Cooperative Research Program, Report 66: Considering and 
Evaluating Airport Privatization (Washington, D.C.: May 29, 2012). 

[10] Number of boardings determines airport size. For the largest 400 
commercial service airports in calendar year 2013, annual boardings 
range from about 45 million at Hartsfield-Jackson Atlanta 
International Airport in Atlanta, Georgia to about 2,500 boardings at 
Atmautluak, Alaska. 

[11] AIP grants, U.S.C. § 47104; PFC charges 49 U.S.C. § 40117. 

[12] Apportionment grants, 49 U.S.C. § 47114; discretionary grants, 49 
U.S.C. § 47115. AIP grants are supported by the Airport and Airway 
Trust fund, which is funded in part by airline taxes and fees (26 
U.S.C. § 9502). At the beginning of fiscal year 2014, the trust fund 
had a cash balance of $13.2 billion. AIP appropriations totaled about 
$3 billion in fiscal year 2013, with a breakdown of 53 percent awarded 
as apportionment grant funds and 47 percent awarded as a hybrid of 
apportionment and discretionary grant funds. 

[13] The annual apportionment can be accumulated for up to four years 
and can be supplemented by the FAA with state apportionment funds. 

[14] 49 U.S.C. § 47109. 

[15] 49 U.S.C. § 40117. 

[16] The Secretary of Transportation approves PFC applications for 
amounts greater than $3 per boarding passenger if the airport has more 
than .25 percent of the total number of annual boardings in the United 
States, the project is an airport-related project, and the application 
includes adequate justification for each project, and for large and 
medium hub airports, if adequate provisions for financing airside 
needs of the airport have been made. (49 U.S.C. §40117). 

[17] 49 U.S.C. 40117(b)(1). 

[18] [hyperlink, http://www.gao.gov/products/GAO-14-658T]. 

[19] 49 U.S.C. 47107. 

[20] [hyperlink, http://www.gao.gov/products/GAO-14-658T]. 

[21] 49 U.S.C. § 47107(l). Airport revenue refers to revenues paid to 
or due to the airport sponsor for use of airport property by both 
aeronautical and non-aeronautical users of the airport such as fees, 
charges, rents or other payments. It also includes revenue from sale 
of the airport property and resources and revenue from state and local 
tax on aviation fuel. FAA Airport Compliance Manual - Order 5190.6B 
Chapter 15. 

[22] 49 U.S.C. §§ 40117 and 47114. 

[23] However, a public entity could issue tax-exempt Private Activity 
Bonds for improvements to a privatized airport. 

[24] The Federal Aviation Reauthorization Act of 1996, Pub. L. No. 104-
264, § 149, 110 Stat. 3213, 3224(1996). APPP, codified at 49 U.S.C. § 
47134. 

[25] 49 U.S.C. § 47134(a). A long-term lease under the APPP would 
shift control of the asset to the private owner since the new owner 
would hold the Part 139 operating certificate. For tax and regulatory 
purposes, a long-term lease is equivalent to ownership through a sale 
of the asset. 

[26] 49 U.S.C. § 47134(b)(1)(A). According to the APPP, this 
percentage is measured by each air carriers' percentage of the total 
amount of aircraft weight landed at that airport in the preceding 
year. Foreign air carriers and air carriers that no longer serve the 
airport are not included in this calculation. 

[27] 49 U.S.C. § 47134(g). 

[28] Match requirements for public airports can range from 10 percent 
for small primary, reliever, and general aviation airports to 25 
percent for large and medium primary-hub airports. There is also a 30 
percent match requirement for airports under the APPP program. 49 
U.S.C § 47109 (a) (4). 

[29] 49 U.S.C. § 47134(b)(2). 

[30] Pub.L.No. 104-264, §149(a)(1), 110 Stat. 3213, 3224(1996). 

[31] Pub. L. No. 112-95, § 156, 126 Stat. 11, 36 (2012). 

[32] The APPP does not require the public-sector airport owner to seek 
competitive bids or to follow any specific procurement process for 
selecting a private-sector airport operator. 

[33] Another possible financial return that the public-sector airport 
owner could obtain could be the sharing of any gains from refinancing 
any debts taken by the private-sector airport operator. As there are 
no federal requirements in the APPP on sharing refinancing gains, such 
a provision would have to be included in the use agreement between the 
public-sector airport owner and the private-sector airport operator. 
No U.S. airport privatization agreement has included such a provision. 
We have reported that toll-road privatizations in the UK and in 
Australia had provisions that any gains from refinancing by 
concessionaires that are not already factored into the calculation of 
tolls be shared equally with the government. GAO, Highway Public-
Private Partnerships: More Rigorous Up-Front Analysis Could Better 
Secure Potential Benefits and Protect the Public Interest, [hyperlink, 
http://www.gao.gov/products/GAO-08-44] (Washington, D.C.: Feb. 8, 
2008). 

[34] ACRP, Report 66: Considering and Evaluating Airport Privatization. 

[35] ACRP, Report 66: Considering and Evaluating Airport Privatization. 

[36] ACRP, Report 66: Considering and Evaluating Airport Privatization. 

[37] FAA, Report to Congress on the Status of the Airport 
Privatization Pilot Program (Washington, D.C.: August 2004). 

[38] FAA is currently reviewing the environmental assessment that was 
submitted as part of the proposed privatization of this airport. The 
assessment is focused on the proposed new 10,000-foot runway that the 
private sector airport operator wants to build to ensure that the 
proposed airport expansion and transfer to the private operator would 
not adversely affect the surrounding environment. Federal law requires 
FAA to review proposed changes to airport layout plans (as well as AIP 
and PFC funding decisions among other federal actions) to ensure they 
are in accordance with the National Environmental Policy Act, which 
requires federal agencies to analyze and publicly disclose the purpose 
and need for a project, feasible alternatives, nature and extent of a 
project's environmental effects and proposed mitigation measures. 

[39] The New York Department of Transportation (NYSDOT) allocated $2.5 
million for continued operation and development of Republic Airport in 
Farmingdale, NY, which is owned and operated by NYSDOT. 

[40] ACRP, Report 66: Considering and Evaluating Airport 
Privatization. In addition, according to one private sector airport 
consultant we interviewed who was familiar with Stewart Airport's 
privatization, NEG applied for AIP funding and made capital 
improvements up to the amount awarded for the grants. 

[41] Puerto Rico Public-Private Partnership Authority, Study of 
Desirability and Convenience for Luis Munoz Marin International 
Airport, (San Juan, Puerto Rico: June 2010). 

[42] Six applicants withdrew from the APPP and one application was 
dismissed by the FAA due to a change in legal status to continue the 
privatization process. 

[43] According to FAA, the Puerto Rican government changed 
administrations following elections and the newly-elected 
administration chose not to proceed with this privatization. 

[44] Infrastructure improvements could include development of roads, 
specialized fire or emergency facilities, and acquiring security and 
police facilities and personnel. 

[45] Under Section 103 of the Internal Revenue Code, interest earned 
on most bonds issued by state and local governments is tax-exempt 
meaning that the interest paid to bondholders is generally not 
included in their gross income for federal income tax purposes. 

[46] 49 C.F.R. §.1.83(a)(9). 

[47] Regionally, FAA field staffs provide technical assistance and 
review airport sponsor applications, including Part 139 certification 
for transfer of ownership, and assist with review of applicants' 
airport property maps. 

[48] The amount waived includes the value of land acquired with 
federal financial assistance or the value of grant-funded capital 
improvements including equipment. ACRP, Report 66: Considering and 
Evaluating Airport Privatization. 

[49] 49 U.S.C. §47134(c) contains nine provisions for FAA approval of 
an APPP application. The sale or lease agreement must demonstrate that 
(1) the airport will continue to be available for public use on 
reasonable terms and conditions and without unjust discrimination; (2) 
the operation of the airport will not be interrupted if the private 
operator experiences bankruptcy or other financial difficulty, (3) the 
private operator will "maintain, improve and modernize" airport 
facilities through capital investments and submit a plan for these 
actions; (4) airport fees imposed on air carriers will not increase 
faster than inflation unless approved by 65 percent of air carriers 
having at least 65 percent landed weight at the airport; (5) the 
percentage of increase in fees imposed on general aviation operators 
will not exceed the percentage increase in fees imposed on air 
carriers; (6) safety and security will be maintained at the highest 
possible levels; (7) adverse effects of noise from operations at the 
airport will be mitigated to the same extent as the public airport; 
(8) adverse effects on the environment from airport operations will be 
mitigated to the same extent as the public airport; and (9) any 
collective bargaining agreement that covers airport employees is in 
effect on the date of the sale or lease will not be abrogated by the 
sale or lease. FAA has waived the requirement to pay back the federal 
grants for both airports that have privatized under the APPP. 

[50] This amount is based on FAA's calculation of the unamortized 
value of AIP investments made to benefit Luis Munoz Marin from 1992 
through 2012. 

[51] FAA, Record of Decision for the Participation of Luis Munoz Marin 
International Airport, San Juan, Puerto Rico; In the Airport 
Privatization Pilot Program (Washington, D.C.: Feb. 25, 2013). 

[52] FAA officials estimated this amount from their calculation of the 
unamortized value of the investments made to benefit Midway through 
2010. 

[53] In addition to the considerations listed below, privatized 
airports have a higher matching requirement for AIP discretionary 
grants--30 percent for privatized airports versus 10 to 25 percent for 
public-sector airport owners. With less access to federal funding, the 
value of the privatization to the private sector may be reduced to 
compensate for greater financing costs. 

[54] Special Panel on Public-Private Partnerships, Transportation and 
Infrastructure Committee, U.S. House of Representatives, Public-
Private Partnerships: Balancing the Needs of the Public and Private 
Sectors to Finance the Nation's Infrastructure; Findings and 
Recommendations of the Special Panel on Public-Private Partnerships 
(Washington D.C.: Sept.17, 2014). 

[55] Internal Revenue Service Regulations, 26 C.F.R. §§ 1.141-12 and 
1.142-2. 

[56] Although, as stated earlier, a public sector entity can issue tax-
exempt Private Activity Bonds for investments in a privatized airport. 

[57] ACRP, Report 66: Considering and Evaluating Airport 
Privatization. However, as noted above, public sector entities can 
issue tax-exempt Private Activity Bonds on behalf of a private sector 
airport operator. For example, the tax-exempt status of Branson 
Regional Airport Transportation Development District allowed for the 
issue of tax-exempt private activity bonds on behalf of the private 
corporation that developed and operates Branson Airport. 

[58] ACRP, Report 66: Considering and Evaluating Airport Privatization. 

[59] The payment structures for compensating private consultants 
varied, for example, the Puerto Rico Public-Private Partnership 
Authority paid for these costs but was reimbursed with money from the 
$615 million in lease proceeds. 

[60] The legislation required that all proceeds from the lease be used 
by City of Chicago, the lessor, for either pensions or infrastructure 
investments. 

[61] Public meetings were held and written comments were collected and 
published in the public docket. Summaries of select public comments 
and PRPA and Aerostar responses were included in the FAA's Record of 
Decision outlining the final approval of PRPA to enter and execute a 
40-year lease agreement with Aerostar for the lease of Luis Munoz 
Marin International Airport. 

[62] Special Panel on Public-Private Partnerships, Public-Private 
Partnerships: Balancing the Needs of the Public and Private Sectors to 
Finance the Nation's Infrastructure; Findings and Recommendations of 
the Special Panel on Public-Private Partnerships. 

[63] As previously discussed in this report, service contracts refer 
to the outsourcing of non-core operations to a private entity with 
expertise in operation, maintenance or management of the non-core 
airport activity. Management contracts entail the public sponsor 
contracting out the management and operation of parking facilities, 
terminal concessions, terminal operations, or the entire airport 
system to a private operator. With a management contract, the public 
sponsor retains control of airport functions including airline use 
agreements, federal grants compliance, debt issuance, rates and 
charges governance; and environmental, long-range planning, capital 
improvement programs, and airport economic development. Developer 
financing or operation agreements involve the private sector's 
providing capital investment in projects such as passenger terminal 
construction, cargo facilities and other major airport facilities. The 
private sector can provide full-scale development, operation, and 
maintenance services as well as financing through lease or concessions 
of the facilities under a developer-financing/operating agreement. 

[64] The private firms we met with included financial investors and 
expert airport operators with airport properties financed, owned, or 
operated in the United States and abroad. 

[65] Gary officials contacted FAA to explore the APPP option but opted 
for a management contract and shared draft contracts with FAA. The 
officials also collected information on best practices about 
privatization efforts from FAA and conducted public outreach to 
educate the community about the partnership with private operators 
prior to adopting the airport management and development contracts. 

[66] This project is valued at $3.6 billion and entails the designing, 
building, financing, operating and maintenance of the redeveloped 
terminal. 

[67] The FAA implemented the APPP in September 1997 with the issuance 
of the program's application procedures. 

[68] ACRP, Report 66: Considering and Evaluating Airport Privatization. 

[69] ACRP, Legal Research Digest 7: Airport Governance and Ownership 
(Washington, D.C.: August 2009). 

[70] ACRP, Report 66: Considering and Evaluating Airport Privatization. 

[71] In this context, efficiency refers to what economists call 
"technical" efficiency--providing goods or services at the lowest cost. 

[72] For example, in a study on privatization of British Airports 
Authority (BAA) airports that took place in the mid-1980s, Parker 
found that privatization did not appear to affect the technical 
efficiency of the airports, and that instead, efficiency was driven by 
the varied efficiencies of the airports that were part of BAA over 
time. See Parker, David, "The Performance of BAA before and after 
Privatisation: A DEA Study", Journal of Transport Economics and 
Policy, Vol. 33, No. 2 (1999). Additionally, work by Oum et al. (2006) 
and Oum et al. (2008) suggests that efficiency outcomes may have a 
complex relationship to ownership structures. Specifically, while 
fully private ownership appeared to be more efficient than varied 
forms of government ownership in these studies, full government 
ownership was more efficient than certain forms of shared government-
private ownership. See Oum, Tae H., Nicole Adler, and Chunyan Yu, 
"Privatization, corporatization, ownership forms and their effects on 
the performance of the world's major airports", Journal of Air 
Transport Management, Vol. 12, (2006) and Oum, Tae H., Jia Yan, and 
Chunyan Yu, "Ownership forms matter for airport efficiency: A 
stochastic frontier investigation of worldwide airports", Journal of 
Urban Economics, Vol. 64, (2008). 

[73] The seven airports that we reviewed capital information were 
from: Louis Armstrong International Airport and New Orleans Lakefront 
Airport in New Orleans, LA; Midway International Airport in Chicago, 
IL; Luis Munoz Marin International Airport in San Juan, PR; Niagara 
Falls International Airport in Niagara Falls, NY; Gwinnett County 
Briscoe Field, in Lawrenceville, GA; and Stewart International Airport 
in Newburgh, NY. Midway, Louis Armstrong, Stewart, and Luis Munoz 
Marin airports were all commercial service airports when they 
submitted their capital improvement information. 

[74] Qualified private activity bonds are tax-exempt bonds issued by a 
local or state government to provide financing for specified privately 
used facilities. Such bonds may be used to finance investments in 
airports as long as the latter remain technically owned by a 
government. The provision of tax-exempt financing can have additional, 
indirect effects on federal revenues, which depend on how, if at all, 
that financing affects the upfront payment that the government 
requires for participation in the privatization. If the government 
demands a higher payment if it commits to tax-exempt financing for the 
deal than it would demand if it did not provide that financing, that 
payment increase would reduce the investor's return, and, thereby, the 
amount of tax it would pay. If the government does not require a 
higher payment in return for the tax-exempt financing, then the 
investor's return and tax payments would be higher than would have 
been the case without the subsidized financing. 

[75] Pass-through entities, such as partnerships, do not pay taxes 
themselves; rather they pass through their profits and losses to their 
partners, which include those amounts on their own tax returns. 
Generally, the partners pay tax on the income in the year in which it 
is earned. However, if the partner is a tax-exempt entity, such as a 
public employee pension fund, then the income will not be taxed until 
it is paid out as pensions to individual participants. One lawyer who 
has advised several airport and highway privatizations noted that such 
pension funds have participated in these investments. The private 
sector leaseholder of Luis Munoz Marin International Airport, Aerostar 
Airport Holdings LLC (Aerostar), is organized under the laws of Puerto 
Rico. Consequently, any income it may receive from the operation of 
that airport would not be subject to U.S. tax unless the income was 
repatriated to U.S. shareholders or partners. (Aerostar is 50-percent 
owned by a Mexican company.) 

[76] The specific tax rules that would apply will depend on the 
particular terms of agreement and circumstances of each privatization. 
Under certain conditions, the investor would be able to claim federal 
tax deductions for depreciation and/or amortization with respect to 
the upfront payment made to the government owner. Depreciation is the 
accounting process of allocating against revenue the cost expiration 
of tangible personal property, plant, and equipment. Amortization is a 
similar accounting process that is applied to certain intangible 
property, such as a franchise right to collect fees, under the federal 
tax code. The investor would also be able to deduct expenses related 
to ongoing business operations, as is typically allowed under the tax 
code. 

[77] Additional investments and improved operations by the new private 
investor could lead to an overall increase in those incomes, or those 
incomes could decline if the overall operations of the airport 
deteriorate or if the new investor captures a larger share of those 
incomes through higher rental charges. Although the new investor's 
appropriation of a larger share of the incomes may not decrease the 
aggregate private income generated by the airport, it would shift that 
income across entities and, thereby, may change the rate at which that 
income is taxed because effective tax rates can vary across different 
businesses. 

[78] For example, if the public owner did not have to issue more tax-
exempt debt because of the payments, federal tax revenues could 
increase. 

[79] The government's detailed use of the payment would be difficult 
to determine with certainty due to the general fungibility of 
government funds. 

[80] Under the APPP, any collective bargaining agreement that is in 
effect on the date of the sale or lease shall not be nullified by the 
sale or lease. 49 U.S.C. § 47134(c)(9). However, a private sector 
airport operator would have had or has the ability, just as the public 
sector owner would have, to renegotiate labor contracts once they 
expired as well as renegotiating or opening up concession contracts 
for competition. 

[81] Reason Foundation, Annual Privatization Report 2014: Air 
Transportation (Los Angeles, CA: March 2014). 

[82] Both Ronald Reagan Washington National Airport and Washington 
Dulles International Airport are leased to the Metropolitan Washington 
Airports Authority under a 50-year lease, effective June 1987, with an 
amendment extending the term to 80 years to 2067. 

[83] CRS, Airport Privatization: Issues and Options for Congress 
(Washington, D.C.: May 2014). 

[84] Eleven stakeholders interviewed did not offer any lessons learned. 

[85] Puerto Rico Public-Private Partnership Authority, Study of 
Desirability and Convenience for Luis Munoz Marin International 
Airport. 

[86] Puerto Rico Public-Private Partnership Authority, Partnership 
Report for the Procurement to Acquire a Lease to Finance, Operate, 
Maintain, and Improve Luis Munoz Marin International Airport (San 
Juan, Puerto Rico, July 2012). 

[87] The review board consisted of aldermen and representatives from 
business, non-profits, and labor groups. The committee was to make a 
recommendation on the privatization process and any potential deal to 
the Chicago City Council to include an evaluation of the public 
benefits of the potential deal, the fairness of the process, and an 
evaluation of the potential deal's fair value. 

[88] FAA rate and fee policy, 61 Fed. Reg. 31994, (June 21, 1996). 

[89] We interviewed FAA staff several times over the course of our 
engagement and combined their responses as one stakeholder. 

[End of section] 

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