In 1977, as a group of policymakers attempted to apply economic theory to the regulation of airlines, future American Airlines (AA) chairman Robert Crandall was not happy. Then an executive at AA, Crandall claimed that the economists’ ideas would ruin the airline industry. Things came to a head when he confronted a Senate lawyer prior to a hearing, reportedly shouting: “You f—king academic eggheads! You don’t know s—t. You can’t deregulate this industry. You’re going to wreck it. You don’t know a g——n thing!”
Thirty years after a bipartisan coalition passed the Airline Deregulation Act (in October 1978), the subject is still hotly debated. Supporters of deregulation claim that it worked mostly as predicted: fares fell dramatically in real terms as new entrants clamored to serve competitive markets. Critics such as Crandall point to numerous bankruptcies, industry upheaval, and the increasingly miserable experience of air travel as evidence of its failings.
As I noted in the September/October issue of The American, proponents of the Airline Deregulation Act knew at the time that it was incomplete. Congress deregulated the airline sector but left the government-run aviation infrastructure intact. As deregulation guru Alfred E. Kahn said in 1978, “There is no guarantee that freer competition on the airline side of the equation—that is the part that creates the demand for airports—alone will solve these problems. On the contrary, it will stimulate more air travel.” Competition unleashed a torrent of demand for flying, but the infrastructure has not been able to keep up. Airports are still largely owned and operated by the government. They serve as chokepoints in the aviation system, and their capacity has been constrained by the Federal Aviation Administration (FAA), which has been slow to implement new air-traffic control technologies.
Economists are once again wading into the deregulation debate, much to the chagrin of industry insiders but to the benefit of the traveling public. In Aviation Infrastructure Performance: A Study in Comparative Political Economy, edited by economists Clifford Winston and Ginés de Rus, several authors explore how other countries have succeeded in enhancing their aviation infrastructure sectors through privatization.
When it comes to such privatization, the United States trails far behind the rest of the world. Indeed, its first large-scale experiment with private airport ownership began just a few months ago, when, as part of a pilot program run by the FAA, Chicago’s Midway Airport was sold for $2.5 billion to a consortium including Citigroup, Vancouver International Airport, and John Hancock Life Insurance. Winston and de Rus report that in many foreign countries, “privatization has not had an adverse effect on an air transportation system’s performance.” The countries that have experimented with airline privatization include Australia, New Zealand, the United Kingdom, Canada, and China.
In Australia, where airports are privately owned in order to optimize efficiency, airport operators “under pressure from regional interests” have incentives to make “excessive investments.” Early in the privatization process, price caps were set too low, causing airports to suffer excessive losses. The caps were then replaced by “monitoring,” which has allowed airport fees to rise but not above uncompetitive levels.
Canada’s major airports, by contrast, are owned by nonprofit corporations designed to boost airport investment. Their investment objectives have been largely achieved, but the nonprofit model has led to higher airport fees than might otherwise prevail.
China has adopted an incremental approach to privatization. Six of its largest airports have been listed publicly since the mid-1990s in order to improve airport efficiency. Although listed airports perform better than their unlisted peers, their performance has fallen short of expectations, which University of British Columbia scholars Anming Zhang and Andrew Yuen attribute to “the fact that the state (the local or national government) still maintains a controlling interest in all the listed airports. As a result of these partial privatizations, the state still has a great influence on their operation and investment decisions.”
The UK’s big experiment in aviation infrastructure privatization was a failure. Privatized in 1986, BAA plc (now owned by Spanish infrastructure giant Ferrovial) owns London’s three largest airports—Heathrow, Gatwick, and Stansted—which together comprise 91 percent of passenger traffic in the southeast of England. This past August, the UK Competition Commission reported that common ownership has had profoundly anticompetitive effects, and it recommended that BAA sell two of its London airports and one of its main Scottish airports. (BAA responded by beginning the process of selling Gatwick.) The original rationale for consolidating control of British airports was that only a large entity such as BAA had the resources to fund major improvements. But the Competition Commission found that BAA was capable of handling only one major project at a time, leaving its other airports—and London travelers—to languish.
The results of foreign privatization experiments affirm that competition, choice, and proper incentives are the essential components of a safe and efficient aviation infrastructure sector. U.S. policymakers and airline executives ought to pay close attention.
This review of Aviation Infrastructure Performance: A Study in Comparative Political Economy, edited by Clifford Winston and Ginés de Rus, was originally published on American.com on December 5, 2008.