Privatization proceeds

There was once a time when privatization in the US was a dirty word when it came to infrastructure - particularly airports - which were deemed of high strategic importance.

Not so now.

The credit crunch, struggling cash-strapped municipalities and airlines selling basic assets like airplanes to survive soaring jet fuel costs have changed perceptions, language and indeed financial realities. Concern about protecting America’s airports and the communities they serve led Air Transport Association (ATA) president James May to warn earlier this week that up to 200 communities could lose airline services as high fuel costs force passenger capacity cuts.

One result of this change in the economic climate is that across middle America the concept of leasing airports (privatization) is beginning to gain urgent traction.

Long-term lease
Chicago’s Midway is expected to pave the way and it will be the first among a wave of like transactions. It is currently reviewing six bids from groups vying to enter into a long term lease of the airport, which is owned by the city of Chicago. The lease could run for at least 50 years and will be a 100% ownership stake. This transaction is permitted as part of a federal pilot programme that allows five airports to move into private hands.

It is believed that up to US$3 billion could be raised by the Midway privatization, providing a welcome opportunity to pay off existing debt at Midway at a time when interest rates are rising. The rest of the funds will be used to bankroll a massive expansion of the airport’s facilities. There may even be some left for the city’s deep pension fund liabilities.

Chicago has taken a long time to get this far. The idea was first floated in 2004 by mayor Richard Daley after the successful lease of the Chicago Skyway toll bridge to a foreign consortium led by Cintra Concesiones de Infraestructuras and Australia’s Macquarie Infrastructure. That raised US$1.8 billion, but not without some headaches. Local concerns had to be smoothed over.

Persuasive proposals
One of the main worriers about Midway’s proposed privatization was Southwest Airlines, the main carrier at the airport. Late last year Southwest was persuaded by the promise of stable operating rates. Unions too were cajoled by similar promises about guaranteed jobs, pay rates and pensions.

In a recent editorial, The Chicago Sun said, “let’s not be blinded by the pot of gold at the end of the privatization rainbow. But let us not be afraid to try a new approach that could benefit airlines, passengers and the city.”

Washington and other lawmakers are watching the process at Midway. Congress will need to change Federal law to permit more widespread privatization of important airports. That is not a given as politics often gets in the way. Under the Federal Aviation Administration’s (FAA) programme for five airports to be privatized, more than 65% of airlines at a hub need to approve the transaction. The deal between Southwest and Midway is expected to become a model for future negotiations.

For the deal to be finalised the approval of the FAA, the Federal Transport Security Administration and the Chicago City Council is needed. It is all expected to be wrapped up by the end of the year or early in 2009.

Among the next in line for privatization is Mitchell International Airport in Milwaukee, which is considering a 50- to 99-year lease to bring in between US$500 million to US$1. billion over the term of the agreement.

With such figures being quoted, more airports will no doubt join the line.

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