Mythbusters: Getting airport PPPs off the ground

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Editor's Note: The World Bank Group is committed to helping governments make informed decisions about improving access to and quality of infrastructure services, including using Public-Private Partnerships (PPPs) as a delivery option when appropriate.  One of the PPP Blog’s main goals is to enhance the understanding of PPPs while eliminating misconceptions about them, ultimately enabling better decision making throughout every stage of the PPP cycle. To that end, the “Mythbusters” series, authored by PPP professionals, addresses and clarifies widely-held misunderstandings.

Like the Sirens whose voices lured mariners to their death, myths can undermine the best projects. The myths surrounding airport public-private partnerships are particularly distracting, and can sidetrack policymakers from the opportunities these transactions offer. But an open mind, commercial awareness, and the aid of experienced advisers can cut through the clamor.


1. “In time of need, sell the family jewels”

When fiscal space is tight, government budgets are stretched and the economy has seen better days, there is a temptation to “sell” high value state assets in an effort to “release” value. An airport is a prime target with good revenues, access to foreign exchange, and a golden future. It is tempting for decision makers to want to sell off an airport. This may not be the wrong decision, but this is the wrong reason to make that decision. Careful analysis is needed. In particular, would the government be better serviced by a share in revenues instead of an outright sale (not to mention control and incentive issues)?

Buy low and sell high: the same logic applies to privatization.  The analysis needs to be done in a dispassionate, careful manner, considering whether to sell now when improvements are needed, or share in the profits later.
 

2. “The myth of the hospital pass”

In the great game of rugby, a “hospital pass” involves chucking the ball to a teammate seconds before experiencing a near-fatal tackle by the opposing team. (The tackle is likely to result in a hospital visit.) Some see airport PPPs as the “hospital pass” of the transport sector—a way to offload the difficult and expensive challenges of an airport to the private sector. While PPPs are a good way to get more help resolving such issues, it is worth remembering that the government never steps out of the airport, it merely brings in a partner (hence the name “public-private partnership”). Or, PPP might stand for “preparation, preparation, preparation,” requiring careful thought and analysis before commencing the bid process. The government needs to know exactly what it wants, where the risks lie, and how those risks will be allocated before starting a dialogue with private investors.
 

3. “The airport authority should enter into a whole series of arrangements, including the PPP, to maintain control and maximize benefits”

In parallel with designing and implementing a PPP, airport authorities are often tempted to enter into other commercial arrangements for different airport services (such as fuel farms, parking, and duty free) in an effort to maximize control and revenues earned from the airport. In other cases, the PPP takes time to arrange, and the airport authority feels the need to pursue, such other commercial arrangements to avoid the appearance of inactivity. But this is not in the airport authority’s interests. A PPP operator can deliver comprehensive airport services more efficiently than can numerous individual service providers.  By splitting out services, the airport authority will make less off of those services and will achieve less efficiency. The eventual PPP operator will have challenges managing these separate arrangements, and may have to buy them out, which will reduce the revenues available for the airport authority and may undermine the continuity of the entire project.
 

4. “Build it and they will come”

It is commonly believed that after the airport terminal expansion is completed, passenger traffic will increase. But this belief is not necessarily related to capacity concerns. It is a response to wishful thinking: that because there has been an investment, a return may follow. Traffic will increase only if an investment solves an operational restriction on the airside (runways, taxiways, and apron). Stylish new terminal buildings will not alone increase traffic because passengers are not motivated by an airport to travel, but rather by business, tourism, or a visit to friends and relatives. Have you ever traveled to a city just because the airport was pretty? The traffic is the response to the market needs, and it exists apart from the airport infrastructure. Investments in airport terminals are driven primarily by the need to provide a good level of service to users (passengers and airlines), and at the same time they serve as a source of national pride.
 

5. “Leave well enough alone”

Private involvement is a huge undertaking. It is expensive to prepare and requires bravery (to address entrenched interests and those less keen to use transparent, competitive procurement). Therefore, some would prefer to avoid private involvement and continue to muddle along. But it is a myth that these difficult decisions can be avoided. When ignored, they grow worse, and more costly. Whether PPP or public reform, these difficult issues need to be addressed.
 

6. “It’s all about airports”

Public sector airport authorities are often specifically focused on airport functions and their management. This may limit attention to the commercial returns available for airports and associated businesses. Yet PPPs leverage heavily off these commercial revenues. Developing the commercial side of the airport is important to improve the quality of service for the passengers, and to mobilize finance for infrastructure. Decision makers need to understand this dynamic, the detail of how those revenues will be made, and when they should be shared with the government.

 

7. “It has nothing to do with the airport,” a.k.a. “It’s just a shopping mall with airplanes”

The potential for non-aeronautical revenues can transform a marginally profitable airport into a gold mine, but beware the tendency to focus on retail, hotels, conference centers, car parks, or property development. The government needs, first and foremost, a well-run airport. The investor needs to be looking at operating the airport first and making this extra money later. A focus on non-aeronautical operations—in particular during the bidding criteria—can result in the selection of less proficient airport operators, or bids that have not planned well for high-quality airport services.
 

8. “It will be a hub”

Policymakers and airport managers often claim they will attract more traffic to their airport by making it a hub. But an airport does not become a hub just by being blessed with a privileged geographical location, or by investing heavily in infrastructure. To be a hub, an airport needs to be chosen by an airline that wants to base its operations there. For that to happen, an airport needs an important concentration of origin and destination (O&D) traffic of high-yield passengers to subsidize the lower yield connecting traffic. In other words, passengers have the option to take direct flights, and choose routes connecting through hubs due only to lower fares. Passengers are generally willing to pay a premium for the convenience of direct flights. Airlines cannot operate profitably by transporting the majority of their passengers connecting at lower fares. And the large network of routes generated by the demand of the O&D traffic is what makes it an ideal connection center for passengers coming from other airports. Without a great deal of the traffic generating or ending at the airport, and without an airline arriving to exploit that traffic, the airport will never be a hub.
 

9. “It will be a cargo hub”

Another common belief is that any available runway (even an abandoned airport) can be converted into a cargo hub. The great majority of world air cargo is shipped in the baggage hold of passenger aircraft. It is actually the passenger network system that allows cargo owners and shippers to distribute goods to a variety of destinations. The economies of scale required to make a cargo-only airport feasible are present at a handful of airports worldwide—most of which process cargo that is mainly origin and destination. While some perishable goods are often air shipped in large volumes, generating substantial full freighter activity, this is not enough to support the operation of an entire facility. Unless there are substantial levels of imports or exports originating from or destined for a particular airport, or a significant value added at the facility (such as logistics services or some industrial input) the presence of better infrastructure is not enough to develop a cargo airport.
 

10. “It will be a low cost carrier airport”

Another elusive, golden egg-laying goose is the low cost carrier (LCC) airport. The LCC formula is based mainly on short haul flights, low-cost facilities, high volumes of traffic, and minimum time on the ground, among other features. For example, flights over five hours create problems for LCCs due to longer turnarounds, the need for in-flight catering, and in particular crew requirements (such as the need to station crew at one end of the segment). Unless they come in large volumes, LCCs are not great clients to airports: they need low-cost facilities because they spend little time on the ground, they don’t spend on aircraft parking fees, avoid using boarding bridges, and hardly consume in-flight catering. Their passengers do not spend much money at the airport, and there is limited dwell time since they don’t connect. Ultimately, LCCs need a defined market— passengers traveling between city pairs—on a high load factor basis throughout the year. Unless the airport can offer large volumes of traffic, the derived revenues from hosting a few LCC flights may be of marginal importance.
 

11. "Airports compete with each other"

Governments tend to split up airport groups into different PPPs to "generate competition" among the airports. The truth is that when talking about origin and destination traffic, each airport has its own catchment area, its own market — particularly when alternative airports are only reachable by traveling long distances by land and sea. With a handful of exceptions around the world where cities are served by different airports that truly compete for their passengers and airlines (such as Moscow and Tokyo), in most cases passengers do not have a choice. Nor do airlines. Having various airports under one single operator does not hamper competition, because it wasn't there in the first place. Depending on the individual cases, there might be other considerations to avoid bundling too many airports together, but they have to do with preventing regulatory capture and the balance of power between the operator and the government.
 

12. “We will attract MROs (maintenance, repair, and overhaul).”

Among the diverse fantasies many policymakers have is that the development of an airport will be financed by MROs. This is grounded in the belief that dormant airports or airports with very low activity can be used as maintenance facilities to repair airliners. Airlines use MRO facilities to perform maintenance and repair for aircraft. Airlines prefer to repair their aircraft at airports where they normally fly, so they don’t have to ferry the empty aircraft for repair. Of the four different types of repair checks, only the most comprehensive (that occurs once every five or six years) may justify flying an empty aircraft to separate MRO facilities. Equally, MRO operators prefer to be based at active airports where they can also take care of unexpected repairs of scheduled flights, a line of business that can be very profitable. Most importantly, an MRO will be based where highly skilled workers can be easily found and trained, alongside laws favorable to import duties and custom-bonded inventories. Available space and good infrastructure, while useful for an MRO, is not enough to attract MRO operators. They need natural traffic activity, a concentration of home-based aircraft, and a good location close to skilled staff, services, and other potential customers.

Myths are romantic, exotic and a great basis for children’s stories about monsters and mermaids, but not useful when developing a government’s airport strategy. Moral of this story: don’t waste time on the myths no matter how enticing – just ignore the sweet songs of these distractions and focus on the real project.
 

Your Feedback Needed to Update the Public-Private Partnerships (PPP) Reference Guide
We are seeking your detailed input and feedback on the current version of the PPP Reference Guide, especially in the area of stakeholder engagement. Share your comments with us by November 10, 2016.

 

Authors

Andy Ricover

Independent Air Transport Specialist

Jeff Delmon

Senior PPP Specialist

Join the Conversation

Etihad Airlines Servics
February 20, 2017

thank you for sharing these great information about Airport. I think Airport should be clean and attractive that's increase the customer. Before some time i have travel by Etihad Airline that experience i would share with you.

Olufemi Osanyinro
March 02, 2018

This piece is a blockbuster!!!. I've seen 3, 4 and 9 play out on a number of cases. Very easy traps to fall into.