Over the past few years, we’ve seen an increased number of attempts to involve private capital at U.S. airports through public-private partnerships (P3s). Results have been mixed, with high-profile failures at Chicago Midway followed by several successes – including Puerto Rico’s Luis Muñoz International Airport and Denver International Airport’s Great Hall. Since the rollout of the Federal Aviation Administration’s Airport Privatization Pilot Program (APPP), multiple failed attempts to launch joint projects at Chicago Midway Airport (MDW) and other airports around the U.S. have led to the widespread industry belief that the P3 arrangement simply cannot happen here. Outside the U.S., thriving global airports are financed through P3s that balance commercial, economic and public sector interests. A report from ACI-NA found that America’s airports will have $100 billion in infrastructure needs between 2017-2021. So, what is hindering the clear need for additional investment from the private sector in U.S. airports?
In short, I believe the answer is a lack of enthusiastic stakeholder support. To realize P3 success, airports must convince stakeholders that private capital is a viable and beneficial option. In fact, based on the airport infrastructure needs we see in the United States today, I believe stakeholder engagement is the single most important factor in determining their P3 success. That means public- ector champions and private sector bidders must up their game in managing stakeholder expectations. Other countries don’t face this hurdle. In the U.S., however, airports are owned by local stakeholders who face regulatory requirements that call for a dynamic stakeholder management program to guide a project’s success.
Seven key stakeholder groups cover elements of U.S. airport modernization – from project champion to prospective bidders. However, I believe airports should pay the closest attention to three stakeholders that have demonstrated high levels of influence and lower levels of support in recent years: local elected officials, airlines, and the local community.
Demonstrating value to elected officials
Elected officials have an important say in choosing whether to proceed with a P3 option. These public decision makers frequently raise three key concerns: understanding the opportunity, losing control of assets and understanding the value received by entering into a P3. Elected officials, in turn, need to make the case for P3 investment and project timelines to local constituents.
Many elected officials are nervous about making a mistake when it comes to P3s. The onus often falls on the project champion to comprehensively address their concerns and clearly articulate why a P3 option is the right choice. To achieve this, project champions must run a highly transparent process. They should elicit discussion and questions from the broadest range of stakeholders possible, building a foundation of support for the P3 initiative through thoughtful early stakeholder engagement. In essence, building an internal coalition to secure an external P3 coalition.
The Denver Great Hall project, for instance, serves as a good example of successful elected official engagement. The airport director and the mayor’s office championed the project, but they needed approval from the city council. To prepare, the airport and the preferred bidder in the transaction made transparency a priority. Both parties spent days preparing briefing books, answering questions, and addressing concerns in the days, weeks and months before the city council vote. The airport went so far as to open up a data room where city councilors could go to review and study the project. Stakeholder engagement and effective communication, in this case, were the hallmarks of a successful project in Denver — one that could be replicated across the U.S.
Other project champions focus on winning public opinion by clearly articulating and promoting P3 community benefits. In the early 1990s, Stephen Goldsmith, the former mayor of Indianapolis, wanted to get community buy in for a proposed BAA Indianapolis P3 contract installed at Indianapolis Airport. He succeeded by talking openly with his constituents about every way the project would impact the city – and, most importantly, its people. He identified specific and tangible city improvements that could be made with the new revenue on a neighborhood-by-neighborhood and street-by-street basis. For example, placards were installed next to cracked sidewalks stating that this problem would be fixed if the airport P3 was approved. This investment in community engagement gave the project the momentum it needed to be successful.
Sharing profits with airlines
The terms of the FAA Pilot Program give airlines significant power to ultimately approve or reject multi-sector transactions vital to U.S. P3s. Airlines have historically decided to either mildly support U.S. airport P3s – or stay out of the decision process entirely. Even when they stand to benefit from a revenue standpoint. The reason, I believe, is that airlines think they can receive a better deal under the current system of publicly-operated airports than under a P3 structure.
Airlines are understandably skeptical that the profit-driven private sector can deliver infrastructure and operations at a lower cost than the public sector. They see the initial fixed-priced period as a potentially limited-term introductory promotion, not a secure promise to keep costs down in the long run. In order to help secure airline support, investors need to offer two key measures: transparency and revenue/profit sharing. Investors and vendors should be prepared to show airlines exactly how they can expect to realize revenue benefits and cost savings. Then, they should formalize those expectations by developing a long-term, profit-sharing agreement.
In the last five years, an informal template has emerged: In exchange for approval, airports allow airlines to secure a fixed total service price for a defined period of time – typically 10-15 years. For instance, as part of the failed Chicago Midway transaction, Southwest Airlines would have received an annual fixed price for using the airport, no matter how many operations or passengers were handled. Chicago Midway is Southwest’s largest airport. This deal would have meant that its costs there were dramatically lower than any other major station in its system. The deal would have been a great one for the airline. Unfortunately, it didn’t happen. The fixed-price arrangement at Luis Muñoz Marín International Airport in Puerto Rico, on the other hand, has been an outstanding one for jetBlue and American Airlines, the two dominant carriers at that airport.
Winning the support of the local community
While the local community has no direct role in the U.S. P3 process, airport stakeholders shouldn’t underestimate their influence. These folks elect the local officials that often provide final approvals for P3 projects. To secure their support, first and foremost, identify their concerns. The community needs to feel that their views have been heard and are reflected in the process.
Plans to expand airport facilities and increase traffic will naturally lead to fears of increased noise and environmental disruption. While boosting the number of people who travel through an airport may be important to investors, offering clear commitments on noise levels can help balance the community’s concerns. P3s can create huge opportunities for the local economy – large-scale construction programs can create many jobs. Port Authority’s JFK redevelopment program, for example, has prioritized economic value for the community, promising that up to 30 percent of state-funded contracts would go to disadvantaged business enterprises. A good, and more tangible, way for P3 project leaders to demonstrate potential economic value is through a workforce development program or an economic impact study.
Ultimately, investors need a well-developed community outreach plan that goes beyond traditional approaches to community engagement, like town hall sessions. Research-driven engagement and social media enable parties to monitor online conversations in real-time, respond quickly and adapt offerings accordingly. P3 project investors must be transparent because there’s a good chance locals will be nervous or skeptical about their profit-driven motives. They must demonstrate a local presence and commitment to a community’s long-term success – especially investors from outside of the U.S. finding common ground
Reaching a consensus in the face of competing interests requires careful management, but it is possible. For P3s to succeed in the US, airport leaders need to get back to basics and effectively manage the stakeholders involved in planning, project management and community relations. For public decision-makers, sponsors need to be convinced – and then convince people – that P3s are the right choice for a specific community. For airlines, transparency and clear profit-sharing plans are key. For the local community, success results from effective engagement by being authentic and empathetic. This will yield a multifaceted formula for success that can improve airports, communities, economies, travel experiences and people’s lives.
Eliot Lees, Vice President at ICF, specializes in aviation due diligence, valuation, business planning, and infrastructure-related development such as airport/city projects, air cargo, aircraft maintenance, logistics centers, business/industrial estates, fixed base operators (FBO), aerospace manufacturing and fueling. He has worked on a wide range of client engagements in airports, airline and aerospace.
Prior to joining ICF, Mr. Lees was an investment banker specializing in municipal and tax-exempt financing. He spent more than 10 years in various finance positions with leading New England financial institutions, including vice president at the Bank of New England in Boston, Massachusetts.
Mr. Lees has an MBA from Boston University and a B.A. in Economics from the University of Massachusetts.
