Economic Conditions Halt Midway Privatization Efforts

On April 20, 2009, the City of Chicago announced that a pending 99-year lease of Midway Airport has been terminated. Gene Saffold, Chief Financial Officer for the city, explained that the private investors, Midway Investment & Development Company LLC, were unable to secure the financing required to close the deal.

However, Saffold left the window open for privatization at Midway once economic conditions improve for the airline industry and for the investors. Midway has not withdrawn from its participation in the FAA Airport Privatization Pilot Program, where it holds the only slot for a major hub airport. A program representative said that the FAA will allow Midway a "reasonable amount of time" to decide what to do next.

Midway was getting close to becoming the first major publicly-owned, public-use facility to lease its administration, operations and maintenance to private owners. The City of Chicago was expected to complete the financial agreements for a 99-year lease this month with the LLC, made up of a consortium of Vancouver Airport Services Ltd., Citigroup and John Hancock Insurance Company. Midway had been a participant in a Federal Aviation Administration Pilot Privatization Program that would have allowed the airport to change from a publicly owned, public-use facility to private ownership. According to Dr. Susan Shea, Director of the Illinois Division of Aviation, this “field test” for privatization would have begun this spring.

Midway would have joined major airports in Europe, Asia, Mexico and Canada that have turned over administration and operation to private owners. The high-profile lease however has not triggered a rush to privatization in the United States and as Shea points out, Midway had been the only current participant in the FAA privatization program. In February, Connecticut legislators discussed the benefits and risks of leasing at Bradley International Airport and were met with opposition from federal agencies and the Aircraft Owners and Pilots Association. Stewart International Airport in Newburgh, New York was privately leased for several years and participated in the FAA program, but ownership is once again public and Stewart is no longer in the program.

Privatization has the potential of bringing short and long-term revenue to local governments trying to balance their budgets. “A primary benefit is that a private operator can operate the airport and bring revenue back to the city,” said Charles Erhard, manager of airport compliance and operations for the FAA. A municipal government might also want or need to keep airport operations in the area, but transfer responsibility to a private operator, Erhard added.

U.S. observers ponder what might occur if owning or leasing an airport does not create profits for the new owners or for the municipality. A major incentive for the Midway lease was an exemption from FAA rules that requires 100 percent of revenue to be used at the airport. This exemption would have allowed the City of Chicago to use some of the proceeds from the lease for city budget items. Currently, no other major hub airport is eligible for this exemption. This, and the need for sustained commitment from the community during the application process, might be delaying airports from joining the FAA program.
Preparing for Privatizatio
Kevin Willis, compliance specialist at the FAA, adds that when airport and aviation officials are considering privatization, the first thing they should do is look at the financial statement for the airport and ask, “Why aren’t we making money?  Can private ownership and operations make money?”
The next step, said Erhard, is to retain assistance for the city staff trying to meet the application requirements. “You need in-house or retained expertise,” he said. Next, planners need to look at the feasibility of the project, including land use and acquisition for expansion if the new owners want to upgrade the terminal or add retail or other commercial space.

Willis adds that the decision for a municipal or state agency to sell or lease an airport is a local decision and must have committed public support. The sale/lease request must be open for public review for sixty days. Privatization supporters must address the concerns of the community and aviation partners. In Illinois, for example, at least 65 percent of the air carriers using Midway had to approve of the privatization deal. In New York, the city held public hearings regarding the Stewart International Airport lease where people could voice their concerns. It takes political will to complete the process, Willis said, and that is affected by a change in elected officials or a loss of interest.
Next Steps
Now that the Midway deal has fallen through which U.S. airports are the next best candidates for privatization? A 2002 privatization study suggests several major airports, including Indianapolis, Los Angeles, and Austin, but these major hubs would also lack the opportunity for revenue distribution. Will anyone step up?