Frequently asked questions about long-term airport leases
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Frequently asked questions about long-term airport leases

Why would taxpayers and passengers support the long-term lease of an airport?

These frequently asked questions are related to the policy study, Should Governments Lease Their Airports?, which estimates the market value of 31 large and medium U.S. airports as $131 billion in total, including Los Angeles International ($17.8 billion), San Francisco International ($11.9 billion), and Dallas/Ft. Worth International ($11.9 billion).

What is the simple explanation for a long-term airport public-private partnership?

A long-term airport public-private partnership (P3) is a contractual arrangement between the governmental airport owner and an airport company and its financial partners. The private-sector team is selected competitively, and pays lease payments to the city, county, or state government—either annually or (more commonly) in a lump sum up-front. The lease agreement spells out the ongoing relationship under which the private entity is responsible to operate, manage, and improve the airport at its own expense. The government serves as the regulator of the private partner’s performance for the duration of the agreement.

How common are long-term airport public-private partnerships?

Since 1987, more than 100 large and medium commercial airports have been leased or sold to investors worldwide. Among the major airports in this category are Athens, Copenhagen, Frankfurt, London Heathrow, London Gatwick, Madrid, Paris, Rome, Vienna, Sydney, Melbourne, Auckland, Cancun, Montego Bay, Lima, and Santiago.

In Europe, some of these airports are owned, either in whole or in part, by investors. But more common is a long-term lease, set up as a public-private partnership (P3) between the governmental airport owner and a consortium of investors.

Are any U.S. airports currently leased in this manner?

The only U.S. airport currently operated under a long-term lease partnership is the San Juan Airport. It was leased via a 40-year agreement in 2013. Investors have substantially upgraded the airport, pleasing airlines and passengers alike. The government received half of the $1.2 billion lease payment up-front, and it used those funds to upgrade smaller airports and to pay down government debt. Chicago has twice attempted to lease Midway Airport. Westchester County (NY) also began a procurement and St. Louis, in 2019, sought to lease its major airport, Lambert Field. Local politics and economic uncertainties prevented those transactions from being completed, despite investor and airline interest.

Why would taxpayers and passengers support the long-term lease of an airport?

While most large and medium U.S. airports are self-supporting from their own revenues, some are micromanaged by elected officials, which leads to lower productivity and, in some cases, to favoritism in awarding contracts to favored companies. Ongoing surveys worldwide find that passengers rate private and P3 airports as better than government-run airports at being responsive to passenger needs.

What can passengers expect from an investor-managed airport?

There are several empirical studies of how passengers fare in investor-managed airports. A PhD dissertation at Oxford University found that out of 201 airports worldwide, the 29 with private management and operations scored significantly higher on a measure of passenger-friendliness. More recently, the annual Skytrax survey of international airline passengers generally ranks numerous investor-run airports in the top half of its list of the world’s 100 best airports. And a much-cited study in the Journal of Urban Economics also found that airports with majority investor participation scored highest in productivity. The London airports that were among the first to become investor-owned invented what is now the common airport retail model of competing name-brand restaurants and retailers, and the long-term partnership lease of the San Juan Airport brought that model to an airport whose retail model was still embedded in the 1960s.

What are U.S. airports worth to infrastructure investors?

The 2021 Reason Foundation study analyzed 31 large and medium U.S. airports. Based on the amounts paid for long-term leases globally in recent years, the estimated total value of those 31 airports was $131 billion. The net proceeds, after paying off outstanding airport bonds, ranged from negative (in three cases of airports with very large bonded indebtedness) to as much as $10.6 billion (for Los Angeles International).

How did the study choose which U.S. airports to include?

This study reviewed all large and medium-hub airports and selected for study the subset of airports that are operated directly as departments of city, county, or state governments. Those airports show up in studies as being less productive and more likely to be micromanaged, rather than being run as businesses. Hence, they would likely have more room for improvement under private management than airports run by airport authorities. That is why some of the country’s busiest airports—such as John F. Kennedy International, Seattle-Tacoma International, and Orlando International were not included. 

How do investors estimate the value of an airport?

The most common method is to use a multiple of a measure of cash flow called EBITDA (Earnings Before Interest, Taxation, Depreciation & Amortization). Different kinds of infrastructure tend to have different average multiples. The Reason Foundation study drew on a database of global airport transactions assembled by a leading investment bank. Those multiples ranged from a low of 10 times EBITDA (written as 10X) to a high of 35X. To be conservative, the Reason study used 14X for its “low” estimate of gross value and 20X for its “high” estimate. In July 2021, an unsolicited bid for the company that holds the long-term lease on Australia’s Sydney Airport equaled 26X the airport’s 2019 EBITDA. This suggests that the Reason estimates of airport value may actually be too conservative.

Due to the COVID-19 pandemic, wouldn’t the airport be worth a lot less today than in 2019? Shouldn’t airports wait for a better time?

The July 2021 bid for Sydney Airport at 26X its 2019 EBITDA suggests that airport investors are taking into account the long-term value of airports as a growing, revenue-generating industry. In the infrastructure investment world, the United States is seen as a vast, promising, and still largely untapped market for sound long-term investments. To some extent, of course, that is a matter of opinion. The only real way to find out is for several large and medium U.S. airports to test the market and see what kind of interest develops. Nearly all observers were surprised that 18 teams assembled and submitted qualifications in 2019 in hopes of leasing St. Louis Lambert Field. A comparable request for qualifications for a large or medium hub airport in 2021-22 would be a good test of continued investor interest.

If airports are worth this much to investors, why would taxpayers agree to lease them?

City, county, and state governments have many unmet financial needs, such as needed but unfunded infrastructure projects, high levels of debt threatening their bond ratings, and under-funded public employee retirement systems. A long-term lease with a billion-dollar-scale up-front payment may be attractive to governments for addressing one or more of those needs.

How would governments spend the money from a long-term lease of this sort?

In most cases worldwide, the entire long-term lease payment is made up-front, providing the owner with a large one-time windfall. A windfall of this kind should be used in ways that have long-term benefits to the governmental airport owner. One such use is to build (or rebuild and modernize) other infrastructure that serves the public. When Indiana leased the Indiana Toll Road for $3.8 billion, it invested $2.6 billion of the proceeds in a 10-year statewide highway investment program. Another wise use could be to pay off some of the jurisdiction’s existing bonds, aiming to increase its bond rating. Chicago did this with most of its $1.8 billion proceeds from leasing the Chicago Skyway. Another sound use for many governments would be to reduce or eliminate the large unfunded liability of its public employee pension system. In some cases, like San Juan, only part of the lease payment is made up-front, with the balance paid annually during the term of the lease.

Would the government airport owner lose control of the airport?

The kind of long-term lease allowed by Airport Investment Partnership Program (AIPP) is a public-private partnership between the airport owner (e.g., a city, county, or state) and a consortium that has been selected competitively to be the private partner. The long-term lease agreement (e.g., 40 to 50 years) is a very detailed contract, spelling out roles and responsibilities, defining performance measures that the private operator must meet, addressing future airport improvements to be made by the private partner, and much more. In effect, the airport owner becomes the regulator of the company’s performance under the terms of the long-term agreement. Obviously, a workable agreement must be consistent with public-sector goals while allowing the company to operate the airport as a business (i.e., without micro-management). Fortunately, with over 100 airports being operated this way worldwide, there are numerous long-term agreements that can serve as examples.

What kind of companies would bid for an airport, if it were put up for lease?

Generally, a consortium is assembled that often include one of about a dozen global airport companies plus one or more investment partners. These can include public pension funds, insurance companies, and specialized infrastructure investment funds. The latter are pools of institutional capital, which accept equity from limited partners (including pension funds and insurance companies) to invest in long-lived, revenue-producing infrastructure. Of the 18 teams that submitted qualifications to bid on the St. Louis airport, the 12 that were invited to make presentations each included an airport company and either or both an infrastructure fund and a pension fund.

How long would the typical long-term lease be?

Long-term airport leases are typically in the 40-50-year range. In similar leases of toll roads, the Indiana Toll Road lease has a 75-year term. Most of the major airport leases in Australia are for 50 years, with an option for renewal for an additional 49 years. The length of the lease term would generally be proposed by the airport owner and subject to being negotiated as part of the long-term agreement.

What if taxpayers or the government owner is unhappy with the airport’s management or lease after, say, the first 10 years or so?

Long-term lease partnership agreements nearly always include two kinds of early termination provisions. If the company is in serious non-compliance with the terms of the agreement, it can be terminated for cause. That is a very severe sanction, because there is typically no compensation, which means whatever equity the company has invested in the airport is lost. On the other hand, if the government’s objectives have changed over time, despite the company’s good performance, the agreement can be terminated for convenience. In this case, the agreement provides for compensation, since the company made its original investment in the expectation of earning a return over the entire planned term of the agreement. These two kinds of termination provision must be carefully negotiated before the lease can go into operation, to protect both parties.

Isn’t it illegal to use revenues from an airport for non-airport purposes?

Federal aviation regulations used to prohibit any revenue from an airport that receives federal airport grants from being used for any non-airport purpose. Congress changed that, first in 1996 with a small pilot program, and permanently in 2018 by enacting the Airport Investment Partnership Program (AIPP). Airports entering into an FAA-approved long-term lease partnership under AIPP can use the lease revenues for any governmental purpose. Enactment of AIPP has led to significant investor interest in U.S. airports.

Why does the study refer to the net proceeds of a long-term lease?

In nearly all other countries, the proceeds of a long-term partnership lease would be the gross value. However, federal tax law in the United States requires that in the event of a material change in control (such as a long-term lease), a facility financed with tax-exempt bonds must retire those bonds as a condition of the transaction. Therefore, the Reason study in each case subtracted the airport’s bonded indebtedness from the gross value estimate to arrive at its estimated net value to its government owner if long-term leased.

Would the airlines serving the airport object to it being leased?

In the days before airline deregulation (1978), U.S. airlines were strongly opposed to private management and operation of airports, fearing they would lose control over gates and generally fearing change. As airport management worldwide embraced private investment and management, U.S. airlines operating internationally became used to dealing with these new models of management. Over the past decade in the United States, as various airports have become candidates for long-term leases, most major airlines have accepted pro-forma agreements on how they would be charged for operating at the airport. These include American (in 3 cases), Delta (3), FedEx (2), JetBlue (2), Southwest (3), United (3), and UPS (2). This is important because Congress included in the AIPP legislation a requirement that any such long-term lease must receive the approval of 65% of the airlines serving that airport. This requirement was met for San Juan Airport and when Chicago Midway, St. Louis, and Westchester County considered leases.  

What happens to current airport employees in the event of a long-term lease?

At most U.S. commercial airports, the large majority of those working at the airport are employed by the airlines, airline contractors, or companies providing services at the airport (retailers, rental car companies, etc.). In long-term leases of infrastructure, the private-sector partner generally offers jobs to all those actually employed by the airport (as was required in the proposed lease in St. Louis). Because not all civil servants want to transfer to a private company, the government involved may offer transfers to other government jobs for those wishing to remain civil servants.

Full Policy Study: Should Governments Lease Their Airports?