Airport System Planning
4. Global partnership with foreign enterprise
In the United States, the air transportation system matured as it passed through these phases.
Government-Regulated Monopoly
Theoretically, a governmental monopoly in a regulated air transport system should, with skilled planning, lead to an optimal system which has been evaluated as providing the best service to the nation within the context of available resources. Provided that the system can be modeled in terms of output with respect to national goals, the determination of an optimal system should be feasible. Such a hypothesis, however, assumes a number of factors, including:
• Adequate planning skills at the national level
• A broadly accepted method of evaluating available options
• A broadly accepted basis of national resource allocation
• Lack of political interference in the development of an optimal system
• Isolation of the national system from serious interference caused by international perturbations
• Lack of corruption in the government and its administration
In practice, in countries that adopt centralized planning and administration, many problems have been encountered, including:
• Lack of innovation and development of new ideas or new technology
• Lack of risk taking by civil servants with no motivation to enter into courses of action with uncertain outcomes
• A career structure for professionals which bases advancement on length of service and not performance
• Inadequate response to the needs of clients or customers, that is, the airlines or passengers
During government regulation of the airline industry prior to airline deregulation in the United States in 1978, government regulations on the air transport industry resulted in:
• Limited access to medium to small markets and communities.
• The existence of “international gateways” where international flights served few airports in the United States, namely, New York, Miami, Dallas-Fort Worth, Los Angeles, and Chicago.
• The primary airline hubs in the system where connecting and interlining take place were limited to Chicago, Atlanta, Chicago, Dallas-Fort Worth, and to a lesser extent St. Louis and Denver.
• Airline competition was minimal and had no impact on entering new markets or on airfares that were preset by government.
• Most air transportation activity was concentrated in the primary airports, where two-thirds of U.S. enplanements were in the top 24 primary airports (1) and one-quarter of all airline passengers boarded their flights in five primary air-ports: two airline hubs (Atlanta and Chicago O’Hare), two international gateways (New York JFK and Los Angeles), and one that is both (Dallas-Fort Worth).
Deregulated Free Market
The U.S. Congress passed the Airlines Deregulation Act of 1978 ending 40 years of air transportation regulation for domestic services that started with the Civil Aeronautics Act of 1938. About the same time, Congress passed the International Air Transportation Competition Act of 1979, which endorsed the policy of ratifying bilateral air transport agreements with foreign governments that increased competition in international air transportation. These two acts, albeit separately, ushered the onset of a deregulated environment for the airline industry in the United States based on entirely free market principles (2).
Between 1938 and 1978, phenomenal growth in both U.S. domestic and interna-tional air transportation took place. Domestic air passengers grew from just over 1 million in 1938 to more than 267 million in 1978. This growth elevated the U.S. air transport industry from obscurity to one of the major industries in the nation, particularly after World War II.
Despite the remarkable advance and market growth under the regulatory scheme established in 1938, broad public satisfaction with the airline system started to diminish fueled by desire to bring in free competition to the industry and general public distrust of government regulation. Starting in the early 1970s, several political, economic, and regulatory developments brought the dawn of deregulation in 1978, and it was a dif-ferent air transport market landscape afterward. Domestic airline deregulation occurred in two phases (3):
• From 1978 to 1985, air travel was characterized by an explosion of new airlines entering the market with ensuing intense price wars resulting in financial disaster and demise of most new airlines.
• Beyond 1985, the wave of new airline entry into the market was reversed with consolidation and mergers of airlines resulting in a smaller number of airlines in the market.
The free market approach was considered by its proponents to have several overall advantages:
• Access to finance in the normal commercial financial markets
• Introduction of competition, bringing lowest costs to passengers and maximum service levels
• A market-driven approach, with management objectives responsive to passenger consumerism
Opponents of airline deregulation presented a number of potential problems:
• Airlines have no long-term commitment to either routes or airports, which brings an inherent instability to the system.
• The system can be subject to very large changes in transport supply, in terms of airline provision, at very short notice.
• There has been a tendency toward the development of a few very large megacar-riers rather than many smaller and highly competitive operations. Small carmegacar-riers have found themselves subject to predatory competition.
• Most airports are small corporate and financial entities in comparison with air-lines. They find themselves subject to great pressure to conform to the airlines’
requirements.
• Airports which are entirely privatized can have goals which are not aviation oriented and which, furthermore, may conflict directly with aviation needs.
• The transfer of the airport public authority to private ownership entails the transfer of large amounts of sunk public capital and assets, the value of which on the open market is almost impossible to assess correctly. The private enti-ties are prime targets for asset stripping, takeovers, and non-aviation-oriented management.
Public –Private Partnership
After 1978, the deregulated environment continued for most of two decades during which the air transport system witnessed another monumental growth in air passengers passing through airports and boarding flights. While the airline industry financed its own growth, the national airspace system, both airports and air traffic control (ATC)-airways systems, were mostly financed by federal and state governments. During the 1990s, a huge investment was required to upgrade the air transportation system infrastructure to facilitate the significant growth safely and economically.
Federal capital expenditures on airports were financed through taxation legislated back in 1933 and 1941. It was soon realized that funding levels were too low to satisfy the level of development and expansion of the system desired by industry. The air transport industry lobbied Congress and government to establish a new collaborative perspective to funding the needs of the air transport system infrastructure development and airport capacity expansion. The Airport and Airway Development Act of 1970 established the Airport and Airway Trust Fund. Between 1960 and 1982, cumulative public and private investment in U.S. airports was $25 billion, and the federal share was about one-third. The Airport and Airway Improvement Act of 1982 combined the Planning Grant Program (PGP) and Airport Development Air Program (ADAP) into a single normally multiyear grant: the Airport Improvement Program (AIP). The AIP was authorized by the Airport and Airway Improvement Act of 1982 (4). Since the original authorization the Act has been amended in 1994, 1996, 1999, 2000, 2001, 2002, and again in 2003, to change the annual authorizations for fiscal year 1994 through 2007 as well as numerous other program changes.
The Act’s broad objective is to assist in the development of a nationwide system of public-use airports adequate to meet the current needs and the projected growth of civil aviation through funding for airport planning and development projects at airports included in the National Plan of Integrated Airport Systems (NPIAS). In this respect, the AIP is the United States federal grant program dedicated to provide funds to airports to help improve safety and efficiency. Improvement projects relate to runways, taxiways, ramps, lighting, signage, weather stations, NAVAIDs, land acquisition, and some areas of planning. The money is raised through taxes on airplane tickets sold to the public and a tax on aviation fuel. In 2009, funds under the AIP went to 389 NPIAS airports totaling $2.2 billion, averaging $5.5 million per airport. The AIP program also funded improvements to 1,121 general-aviation airports in communities with no airline service, totaling $832 million averaging $742,000 per airport (4).
Therefore, in the context of the entire US air transportation system, funding forms a partnership between the private and public components of the system.
This approach was a middle-of-the-road attempt to bring about the advantages of the two previous approaches. Most countries which are moving toward deregulation and privatization are doing so by forging a “partnership” between the public sector and private entrepreneurs. This may be carried out by adopting a number of models, the most common of which include the following:
1. Private airlines, public airports (U.S. model)
2. Private airlines, large private airports, small public airports (U.K. model) 3. Large semiprivate airlines, small private airlines; large semipublic airports, small
public airports (German and French models, respectively)
The best structure of aviation administration is a matter of political choice, but some form of mixed public– private approach appears to be desirable if, on the one hand, the rigidity of total public ownership is to be avoided and, on the other hand, the volatility and destructive nature of the totally free competitive market are to be avoided.
Global Partnership with Foreign Enterprise
This approach is similar to the last two given above but with the introduction of foreign investment with the national private enterprise in the development of airports.
This form of public and foreign enterprise partnership prevailed with the proliferation of globalization that swept the world during the last decade of the twentieth century.
While each country may have varying levels of government control and regulation of foreign capital’s entry into local markets resulting in partial or total ownership of national infrastructure assets such as airports, this introduction was mostly accepted by government regulators when carried out under special legal instruments such as build-operate-transfer (BOT) contracts or the partnership of national and foreign enterprise.
4.4 EFFECT OF AIRLINE HUBS AND DEREGULATION ON U.S. AIRPORT SYSTEM
The concept of airline hub-and-spoke operation is not new; there were airline hubs before deregulation and they continued afterward. But as airlines gained the route flexibility of deregulation, they placed a degree of emphasis on “hubbing” that far
exceeded prior expectations (2). This strong emphasis by airlines on hubbing has deep roots in basic principles of airline economics. At the dawn of deregulation, there were about 50,000 city-pairs in the U.S. airport system, but only 2% could generate enough local traffic to support the nonstop air service in the new deregulated environment.
The airlines’ response was to offer connecting and one-stop service to “thin markets,”
and it was hubs that could provide the effective and economically feasible means of achieving that.
The benefits to all of airlines that adopted hubbing include:
• Air access benefits to the residents of hub cities, which are usually the larger metropolitan areas and business centers.
• Enhanced international service to the hubs and to the many airports serving as their spokes, bypassing traditional international gateways.
• Enhanced domestic service to small cities that as spokes to the airline hubs provided far improved service over the previous point-to-point system.
• Competition between hubs (actually between airlines) would bring greater benefits to smaller communities through a wider choice of carriers, more service frequency with convenient connections, and perhaps more reasonable airfares.
• The airline hub, by its definition, connects flights of the hubbing airline. There-fore, on-line connections at the hub have the advantage of shorter (preset) layover times, reduced walking distance in the terminal, and greater reliability of bag-gage transfer. Statistics showed that in 1978 one-seventh of all passengers made interline connections, but this dropped to less than 3% in 1988.
In a totally deregulated environment, however, airport system planning is not pos-sible. Because the level of service provided by airlines is largely responsible for the generation of air transport demand at an airport, private-sector airline decisions control demand levels in the system. Airline service provision to a large degree determines the number of air transport trips that would be generated, their origin and destination airports, and the location of transit or transfers. The methodology used by airport sys-tem planners can model the effect of airline decisions reasonably well by use of airport choice and route choice models. Planners cannot, however, with any certainty predict how airlines will make their choices of service provision in a business environment replete with bankruptcies, mergers, takeovers, global influence, and financial restruc-turing. It can be deduced therefore that airport system planning will only work where there is some level of regulation.
Deregulation in the United States was devised essentially to allow airlines to pro-vide service where they wanted at any price they wished. In 1975, the Kennedy Report on “Civil Aeronautics Board Practices and Procedures” outlined the main advantages to be offered by deregulation:
(a) Free route entry and exit to foster more efficient utilization of equipment, more rational route structuring, and better targeting of subsidy for essential services
(b) Real price competition which would result in lower fares, greater choice of products and airline, and elimination of costly “service competition”
The architect of airline deregulation, Alfred Kahn was convinced that “increased competition should make for a leaner, more efficient scheduled operation.” He foresaw that unbridled competition needed control but stated:
One does not assure the survival of a regime of competition by a policy of mere laissez-faire. This is why we have antitrust laws . . . . The preservation of a competitive market structure sometimes requires us to protect suppliers from the application by more powerful rivals of competitive tactics that deny them an opportunity to compete for reasons that have nothing to do with their comparative efficiency in serving the public.
The following conclusions can be drawn from the first decade of domestic deregulation:
1. Exit/entry freedom has allowed many new entries into the industry and has led