Global Trends, Issues and Impact of Airport Privatization in

contributing towards the growth and development of Developing

Economies – A Theoretical Approach

Eighth World Annual Air Transport Conference,

Istanbul Technical University, Turkey, 2004

Paper presented
By
(Dr) P.S.Senguttuvan
Airports Authority of India

SENGUTTUVAN-NR085 1
 ABSTRACT
Liberalization, Globalization and Privatization in the current economic
environment has made a dramatic change in the every facet of life. As markets progressively
globalize, the civil aviation industry is intensifying to create a global economic order to
achieve a significant rate of economic growth. Further, Liberalization in civil aviation
industry has shaped many developing economies, less developed economies to shine in the
global market through competition and efficiency. Therefore, to strengthen the civil aviation
infrastructure, worldwide reformation is taking place to spout private capital resources in the
development of airport infrastructure.

Airport is a capital based industry, which requires massive investment for

expansion and construction to facilitate the growing demand of air travelling public. Today
airports are playing an imperative role in attracting new industries and global business. But,
most of the airports in the world are found bad in shape due to capital scarcity and inefficient
management. This badly impacted the growing industrial development, which in turn impeded
the global business.

Governments in most of the cases do not have the financial capacity to invest in
airport expansion along with their other budgetary commitments. The airports are therefore
required to raise funds on their own and develop the required financial strength to service and
repay borrowings through improved efficiency, better resource management and generating
additional revenue. So privatization in airport infrastructure is very key element, which is
developing a paradigm shift in aviation sector. UK, USA, Australia, Asia are playing a key
role in privatizing the airports for increased competitiveness and opportunities for economic
development, quality services at par with global standards and to increase revenues to the
government.

Key words: - Privatization, Internationalization, Models of Airport Privatization, Trends,

Economic Impact and Issues

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 Contents
Abstract

1. Introduction

2. Purpose of the Study

3. Background: Privatization in Theory and Practice

4. Framework for Assessing Privatization: Related Literature

5. Transport and Private Sector Participation in Developing Economies

6. Role of Airport – Growth and Development of Developing Economies

7. Airport Internationalization (Privatization)

• Reason for Privatization

• Objectives of Privatization
• Different Models
• Airport Ownership & Governance Models
• Ownership Performance & Governance Models in Private Sector
• Global Trend in Airport Privatization
• Global Case studies – UK, USA, Russia, Australia and Asian Region

8. Airport Privatization in Developing Economies

9. Performance Evaluation of Different Ownership Models

10. Conclusion

Literature References

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Introduction

World business is glint by competition, potential cost and market share advantages,
which are stimulated by modern communications and transportation. Internationalization is coupled
with two main developments-viz, the growth of international trade and the growth of international
investments. By screening the growth of internationalization, air transportation acts as a key factor in
the progress of world economy. So, the air transport infrastructure (Airport) is very imperative for the
growth of national and local economy. Therefore, the state should take necessary steps to improve and
develop a good airport infrastructure to achieve substantial level of growth in international trade
tourism, employment opportunities, technological developments and industrialization. Today, airport
industry needs huge capital to invest in expansion and construction of terminals for user communities.
But most of the state finds it very difficult to invest in the airport improvement programme due to
capital scarcity. As a result, state decided to tap the private capital resources to invest in the airport
development programme. Hence, private sector participation in airport infrastructure is indispensable
and inevitable in the current economic environment.

Airport Privatization is the recent issue in global scenario, which is burning in most of
the developed and developing economies. Private sector participation is necessary and obligatory to
promote the aviation infrastructure in the coming decade. Aviation sector helps in fetching
international business to expand and uphold trade in the country to achieve growth and development in
the secondary and tertiary sectors. Today, in most of the industrialized economies, civil aviation sector
plays a high-flying role in the development of country’s growth whereas, in the developing economies
and less developed economies civil aviation sector play a partial role, as a result, international trade is
blocked and turn into infertile with no further developments and growth in the economy. To overcome
this impediment, economic liberalization has initiated globally to expand their market worldwide
without any restrictions with the opening of “OPEN SKIES” Policy in the civil aviation sector during
1990’s. The major industrialized economies adopt this policy to expand and partake in the global
competitive trade to achieve the objective of the country’s development.

To quote OECD statement about the important future of international air transport as
“the International aviation industry is an essential part of the modern, global economy, both
powered by the pattern of economic growth and development. It is an industry which has grown,
remarkably over the past thirty years and has to cope with major economic and technological
confront. There is little evidence that this dynamism is subsidizing, and given the industry’s position
in the national and international economy it is vital that it be able to respond efficiently to the
demands of modern industry and consumers”(World Air Transport Conference, OECD, Paris,
1996).

Purpose and Methodology of the study

The main purpose of this study is to explore the importance of airport privatization in
contributing towards the growth and development of the economy through world wide experience. It
is an exploratory study with help of secondary and primary sources of data. To evaluate the airport
performance measures, data were collected from primary sources to examine the efficiency of airport
under various ownership patterns. The study will throw light on the following –

1. Background: Privatization in Theory & Practice

2. Framework for Assessing Privatization - Related Literature
3. Transport and Private sector Participation in Developing Economies
4. Role of Airport Infrastructure in the growth and development of Developing Economies

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 5. Trends of Airport Privatization Worldwide (1980 – 2003)
6. Impact and Issues of Airport Privatization in developed and developing economies
7. Performance measures comparing the pre and post airport privatization – A case study on few
airports under various ownership worldwide

1. Background: Privatization in Theory and Practice

Before exploring the trend, issues and impact of airport Internationalization

(privatization), let us know the meaning and definition of “Privatization” in general and its importance
in the economy. Since 1970s, following UK and US experiences both developed and developing
economies have picked up the pace of privatization in the traditional public utility industries –
(Electricity, Telecommunications, Transport (Road, Railway, Ports and Airport) and Water supply). A
great beckon of privatization has flounced the world for the last two and half decades embracing the
industrial economies, transition economies, developing economies and less developed world.

The term privatization has various connotations, such as ownership transfer

(divestments of assets and sale of shares), involvement of private activity (management and operation
contract and leases) and green field projects (franchising of public goods) (Cook & Kirkpartick, 1988)
and (Izaguirre, 1998). Privatization is a term used to cover several distinct and possible alternative
means of changing the relationships between the government and private sector (Kay and Thomson,
1986). In simple language, “Privatization is referred to the sale of a public owned enterprise (POE)’s
asset or shares to the individuals or a private firms”. In broader meaning, it refers to “restrict
government’s role and to put forward some methods or policies to strengthen the free market
economy. Government’s role and functions can be reduced or wholly terminated by implementing
various methods like, contracting-out, Franchising, Deregulation and Decontrol, user-charge, grant
system, voucher system, management contract, leasing and joint venture including - Built –Own-
Operate (BOO), Built-Operate- Transfer (BOT) and Built-Own-Operate-Transfer (BOOT)
arrangements.

The main principle of privatization is to increase individual freedoms, support and

progress through efficiency, approach to the demands of the customer, drop off the public debt and
ease the potential stranglehold of trade unions by forcing management to face the veracity of the
market place. Governments have been selling SOEs to private investors to improve firm’s
performance through the discipline of private ownership and as well as to raise revenue without
raising taxes. The main objectives of privatization are –

a. To promote economic efficiency

b. To reduce government involvement in the decision making of industry and promote greater
private initiative.
c. To promote wider share – ownership
d. To provide the opportunity to introduce competition
e. To develop the nation’s capital market
f. To raise new revenue for the state

Of the above objectives, the first objective is need for promoting efficiency in running
commercial organizations, has arguably been the principal motivation. There is a sense that public
ownership is one way or other leads to lower level of efficiency than are possible under private
ownership. The maneuver of infrastructure amenities by private operators is claimed to result in lower
costs than if they were run by the public sector. The cost savings are said to be real efficiency gains
and not simply transfers from one sector of the economy to another, (Gomez-Ibanez, John Meyer and
D. Luberoff, 1991). Lastly, there is an argument that public sector have less inducement to charge
socially efficient prices, since they used for general government purposes such as promoting regional

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economic development and that allocative inefficiencies would arise from a government firm as they
provide the wrong mix of outputs. This means that public ownership will be financed out of general
revenues rather than through user charges. The World Bank, in 1988, reported that approximately
1800 public owned enterprises were being privatized in 83 countries (World Bank 1988).

There are two important arguments in favour of privatization, namely – greater

economic efficiency and productive efficiency by means of wide spread private ownership (Bos
Dieter, 1985). Greater efficiency brings competition in the market economy. A competitive market
creates both allocative and productive efficiency. Allocative efficiency makes the economic resources
fully utilized in the production of goods and services, which people desire most. In other words,
competition causes economic resources to flow their most highly valued users. On the other hand,
productive efficiency refers to a situation, in which the total output of a firm is obtained at the lowest
possible cost for economic resources. In other words, competition forces firms to produce their output
at the lowest possible cost. Hence, privatization is alleged to bring an end to X-inefficiencies in the
public sector. X-inefficiency arises when economic resources are not used to their full capacity.

Privatization has been a key module of structural reform in developed (industrialized)

and developing economies. The main objective of this reform is to achieve higher micro economic
efficiency, foster economic growth and as well as reduce government requirements through purging of
redundant funding. The pragmatic evidence substantiates the theoretical inference that privatization
increases profitability and efficiency in both competitive and monopolistic sectors. From the aggregate
(macro) economic point of view, the trends are positive in terms of public sector deficit, towing of
foreign direct investment and stock market capitalization. During the past one decade, developed and
developing economies betrothed in the privatization programmes worldwide. The total amount earned
through private sector participation in OECD members was US $ 47.1 billion in 2000 (OECD, 2002).
In developing countries, the private activity for the same period amounted to US $ 87.8 billion (World
Bank, PPI Project Database). In the process of economic development and restructuring of
government sector, the timing and sequencing of private activity are very important, since such policy
decisions are often irreversible and crucially determining the proceeding of economic growth.

Theories on Privatization

Regardless of the practical, implicit consensus among privatization authorities, few

economic theories, in which privatization is characterized as a transition process. There are many
static models, among that the two typical analyses are – (i) standard industrial economics literature
focusing on market failure factors in production and consumption and (ii) principal agency – theory,
modeling political intervention and corruption.

As Jimenez (1995) summaries, the rational of allowing State Owned Enterprises

(SOE’s) to have a monopoly market on traditional notions resulting externalities in production and
consumption, economies of scale, non- excludability, asymmetric information and the need to achieve
social objective such as creation of employment opportunity. Particularly, economies of scale strongly
validate state monopoly in providing public services. However, the recent economic model has
limitation in the scope of state owned natural monopoly. Firstly, the Demsetz (1987) competition
model involves in government designed efficient auction mechanism for inviting private sector to
public sectors, in contracting out their public enterprises successfully. Secondly, according to the
contestability approach, there is no sunk cost, free entry and exit will lead to an efficient outcome.
Finally, non-price competition through product differentiation would also leads to improve efficiency.
In reality, the accumulated empirical studies reveal the limited applicability of these static models.
This is because it is often infeasible to implement the optimal auction mechanism and is difficult to
avoid unpredictable bidding behaviour and results, such as collusion and the winner’s curse (e.g.,
Klemperer (1998) and Cramton and Schwartz (2000). It is also difficult to find truly contestable

SENGUTTUVAN-NR085 6
markets; airline industry considered as a good example of contestable markets, but it was found to
have significant entry barriers like incumbents held hub airports, as shown by Borenstein (1989).
Another stream of static arguments is based on the principal-agent theory; publicly owned enterprises
are forced to address political objectives, mainly excess employment, rather than efficiency
maximization. Boycko, Shleifer and Vishny (1996) model proves that privatization of SOE’s can raise
costs for politicians influencing them and thus improve economic efficiency. The cited static models
have strong economic implications to privatization; the dynamic transition from SOEs to private
owned enterprises still remains unexplored. Exceptional works that partly address a dynamic aspect of
privatization are Mussa (1986), in which optimal path of commercial policy can be explored through
trade liberalization. In considering the privatization effect, an assessment based on endogenous growth
theory, particularly the Big Push model appears to be useful. As Murphy, Shleifer and Vishny (1989)
pointed out in the study that public infrastructure is an important component of the big push into
industrialization. This is mainly because large public infrastructure stocks are likely to demonstrate
considerably positive externalities on production in other sectors.

2. Framework for Assessing Privatization – Related Literature

The theory and strategic management related literature on privatization reveals that
ownership influences firm performance, since different owners pursue different goals and posses
different incentives. Under the government ownership, a firm main objective is to achieve welfare
maximization, whereas, under the private ownership firm’s goal is maximization of profit. Profit plays
a significant role in the manager’s utility function. A change in the ownership of a firm will have a
significant effect on its behaviour and performance since transfer of property rights modify the
structure of incentive faced by decision makers within the firm (Vickers & Yarrow, 1989).

Privatization and increased competition are both sources of improved economic

efficiency and in most cases they are complement. A shift in ownership results prerogative to residual
profit. Therefore, the change in property rights results in a change in the structure of incentives for
management, hence management’s behaviour and firm performance. However, there may be trade-off
between internal (productive) efficiencies and allocative efficiencies from privatization (Gillen, Oum &
Tretheway, 1985, 1986). The deregulation of infrastructure through private sector management would
realize the gains available from the discipline of market forces have a concise but successful history.
For instance, New Zealand moved to a “Profit”, Air Traffic Control system in 1987. The impact has
been dramatic, within four years. Airways Corporation of New Zealand recovered full costs, paid taxes
and generated $ 30 million in dividends and reduced expenses by 20.0 percent (Paul Proctor, 1992).

To substantiate the theory and practice of privatization, number of studies were

attempted to examine the efficiency, performance of ownership pattern varying from pure private to
government owned enterprises. The study related to airport privatization is relatively very limited;
therefore we can see the general study made by different experts and economist for supporting the
study on privatization.

(a) Shirley and Walash (2000) pointed out that from 1971 to 1999, 32 studies out of 52 reveals the
superior performance of private firms, 15 studies show no significant relationship between
ownership structure and performance and the remaining 5 studies concludes that the
performance of publicly owned firms are significantly superior to private firms.

(b) Narjess Boubakri and Jean Claude Cosset (1998) recited the impact of privatization examining
over 200 companies privatized by over 41 countries, clearly showing the significant
improvements in the operating performance and financial strength of newly privatized firms in
terms of return on sales, real sales, capital expenditure/sales but not in employment (OECD
economies study). The study reveals the following outcome

SENGUTTUVAN-NR085 7
 • Output, Profitability and Efficiency increases significantly after firms are privatized:
In both industrial and developing countries total earnings of newly privatized
companies increases, on an average of more than 25.0 per cent in the three years
following divesture. Profitability ascends more than doubles in developing countries by
45.0 per cent and 45.0 per cent increase in industrial countries. Efficiency increases by
16.0 per cent and 11.0 per cent respectively in developing and industrial economies.

• Capital Investment spending surges after a firm are privatized: Capital expenditures
increases by 44.0 per cent and above 70.0 per cent in the developing and industrial
country privatization.

(c) World Bank (1994) was assessing the impact of privatization in sub-Saharan Africa and found
that a positive impact on efficiency and economic growth.

(d) La Porta and Lopez-De-Silanes (1998) study covering 218 firms in 26 different sectors,
privatized between 1983 and 1991 revealed that profitability, measured by the ratio of operating
income to sales increased by 24.0 percentage points. Further, the authors decomposed the gains
into three components: increase in prices, reduction in workers and productivity gains. They
found that 57.0 per cent of the gains were on account of productivity increases.

3. Transport and Private sector Participation in Developing Economies

Privatization in transport sector was initiated in 1980’s with 13 developing countries,

attracting US $ 12 billion from 1984 to 1989. Projects started with toll road in Mexico, Malaysia and
Thailand. During 1990-2001, the private participation in transport sector was massive and vibrant with
sixty-six (66) developing economies attracted $US 135 billion for 662 projects using various form of
divestures. China accounts half of the divestures and offered minority stake on stock exchange,
allowing state owned enterprises to raise capital and retained government control over these
companies. Using this approach, China partially privatized large number of toll roads, railways and
airport. Russian Federation carried out privatization through vouchers schemes in the development of
airports and other infrastructure sectors. Latin American countries divested through public tenders of
controlling stakes. Latin America has topped the major divesture in transport segment followed by
East Asia. In other developing economies private sector participation has taken place in the second
half of the 1990’s mainly in one or two sub sectors. Private activity focused major on toll roads and
airports in Europe and Central Asia (Russia), seaports in South Asia, toll roads and seaports in sub-
Saharan Africa, Seaports and Airports in Middle-east and North Africa. Brazil, Argentina, Mexico
received US $ 53.5, $ 28.4 and $ 30.4 billion respectively, as a result of privatization sales. Smaller
countries like Peru, Indonesia, Colombia and India received $ US 11.2, $ 6.0, $ 8.0 billion and $ 8.3
billion during the same period.

Latin America and the Caribbean region leads the major share of cumulative
investments of $ US 67.6 billion followed by East Asia with $ US 55.7 billion during the period 1990-
2001 (Table-1). The other regions cumulative investment was $ 5.1 billion, $ 2.7 billion, $ 2.4 billion
and $ 1.8 billion in Europe and Central Asia followed by Sub-Saharan Africa, South Asia and Middle-
East and North African regions. Figure – 1 shows the region-wise percentage share of cumulative
investment. Latin America and Caribbean accounted (50.0 per cent) followed by East Asia (41.0 per
cent), Europe and Central Asia (4.0 per cent), Sub-Saharan Africa and South Asia (2.0 per cent) each
and Middle-east and Africa (1.0 per cent) respectively. From this analysis we can ascertain that private
sector participation in developing economies is concentrated major on transport sector and playing a
key role in the development of economy

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 Table – 1
Region-wise Cumulative Investment, Number of Projects & Countries – (1990-2001)
Regions Countries Projects Investments Percentage Share
(Numbers) (Numbers) ($ Billion)
East Asia & Pacific 10 229 55.7 41.0
Europe & Central Asia 10 043 05.1 04.0
Latin America & Caribbean 10 295 67.6 50.0
Sub-Saharan Africa 17 038 02.7 02.0
Middle-East & N Africa 06 016 01.8 01.0
South Asia 04 041 02.4 02.0
Total 66 662 135.3 100.0
Source – World Bank Report, PPI Project Database, 2001
Figure - 1
Region-w ise Percentage Share in Transport Investm ent through Private Participation -
(1990-2001)

Middle-East & N Af rica

1.0
Sub-Saharan Af rica South Asia
2.0 2.0

East Asia & Pacif ic

41.0

Latin America &

Caribbean
50.0

Europe & Central Asia

4.0

In the following table (Table-2 & Figure-2) we can reveal the investment made by private sector in the
various modes of transport sector during 1990 – 2001. The major investment made by the private
sector was on the development of toll roads amounting US $ 76.0 billion (56.2 per cent) of the total
investment towards the development of 327 projects followed by US $ 28.8 billion (21.3 per cent) in
76 railways projects, US $ 18.0 billion (13.3 per cent) in constructing of 177 seaports projects and US
$ 12.5 billion (9.2 per cent) in the development of 82 airport infrastructure projects during the same
period.
Table – 2
Private Participation in Transport by Sub-Sector wise – (1990-2001)
Sub-Sectors Projects (Numbers) Investments ( $Billion) Percentage Share
Airports 082 12.5 09.2
Railways 076 28.8 21.3
Seaports 177 18.0 13.3
Toll Roads 327 76.0 56.2
Source – World Bank Report, PPI Project Database, 2002

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 Figure – 2
Private Participation in Transport by Sub-Sectors - (1990-2001)
Airports
9%

Railw ays
21%

Toll Roads
57%

Seaports
13%

It is clearly evident from the above table that the private sector participation was very
slow in airport infrastructure sector due to various issues pertaining to strategic property. In the present
scenario most of the public airport authorities and government are very keen in bringing private capital
sources in the development of airport infrastructure for two reasons. Firstly, airport infrastructure
needs huge investments and secondly to set right the performance (Economic, Technical and Quality)
and efficiency of airports due to X-inefficiencies.

4. Role of Airport Infrastructure - Growth and development of Developing Economies

Airport is an inter-modal transfer facility between ground and air transportation. It is a

processing centre and provides the necessary facilities for ticketing, documentation and control of
passengers and cargo (Ashford N. Martin – Stanton H.P & Moore C A 1984). The economic feature of
an airport is a multi-product nature of activity and usually regarded as uncontestable (Nature)
monopolies. The main functional activities of an airport is classified into three categories namely
• Essential Operational services and facilities
• Ground handling services and thirdly
• Commercial services.
In other words it is commonly known as Aeronautical and Non-aeronautical services. Airport services
fall into three categories: Long-haul services, Short-haul services and Domestic services, for inbound
and outbound air travellers and freight.

The globalization of the economy relies increasingly on air transport with airports acting
as the main technical support. Airport is playing an increasing importance in the development of
gateways to Technology / Industrial parks, Amusement / Tourist centres, Commercial complexes and
acts as focal points for aviation activities involving in multitude of distributions and exchanges
contribution to business competitiveness and efficiency in the developing economies. Airports will be
the hubs for future growth of urbanization with integrated transport and information technology to
stimulate trade and tourism growth in the developing region. The most important economic impact is
generating employment opportunities to thousands of people directly and indirectly in many of the
developing economies largest airport sites.

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 Airport is acting as a “Multi-Modal Business Centre” in the growing economies,
especially in developed and developing economies. Today most of the developing economies are
considering “Airport as a powerful engine of Regional and National economic development”. It is
recognized as major centre for Business, Commercial and Industrial activity, which can derive the
Economies of Entire Regions. Over 0.5 billion passengers rely on the developing regions airports
every year and this could exceed 1.0 billion by 2010. The total economic impact of air transport on
gross world output amounts to US $ 1400 billion, which comprises US $ 320 billion in direct impact,
US $ 400 billion in indirect impact and US $ 680 billion in induced impact (ATAG, 2003).
Developing economies contributes 20.0 per cent of the total air transport gross world output. The
growth of developing economies during the last one decade, has witnessed a significant rate of 5.0 per
cent in the economy in terms of trade, employment and national income. Air transport is one of the
most important factors in achieving economic growth. The main roles of airport infrastructure in
economic development are:-

• It generates employment opportunities directly and indirectly

• It contributes approximately 2.0 % in the growth of GDP
• It promotes international and domestic tourism
• It contributes in foreign exchange earnings
• It contributes in promoting international trade, industrial and technological development in the
economy

5. Airport Internationalization or Privatization (1980-2003)

The concept of privatization in the airline industry goes back to 1972, when US airline
industry decentralized. Privatization of airports and its facilities is a more recent concept, which
originated in the 1980’s. Traditionally, airports are owned and managed by the government until
1970’s. Later on airports started changing the ownership and management structure through
establishing autonomous entities owned by the governments. Further changes were taken place
globally and led to favour private participation from 1980’s and the first bidding of privatized airports
started in 1987, U.K. government sold its eleven major airports including three airports (Heathrow,
Gatwick and Stansted) in London area to BAA plc. (Formally British Airports Authority) a 100 %
private sector firm. Since then, many airports worldwide have started changing their modern strategic
version in the process of privatization. Subsequently, globalize transformation economy paved a way
for free economy and indirectly supported airport infrastructure to view as enterprises, rather than as
public services which are accepted to break-even. This activated the growth of a new market in the
airport services including infrastructure development, airport management systems and partial
ownership or management contracts in the areas of ground handling and retailing. Over the past few
years, new airport investors have entered in the market. Airport privatization is concentrated in two
regions – Latin America and Europe. But today, the privatization process is being initiated everywhere
– from the Caribbean, South Africa, Russia, Brazil, Asia and Pacific airports.

In todays, global economic environment, airport industry is revolutionized with the

modern concept of airport internalization, i.e., privatization and commercialization. Airports are
playing a gargantuan role in developing the economy of the region they serve. Worldwide experience
has proved that their contribution will be higher if they are managed professionally by allowing them
autonomy in decision making, meeting their growing financial needs and dovetailing their role with
their interest of the communities they serve. Airports Council International Policy handbook
categorically mention that, “Airport must be able to collect sufficient revenues to carry out their
functions properly and to maintain a quality of services, which is acceptable to users”. Governments
are in favour of incorporating private sector in airport management and development in the developed
and developing economies. There are about 120 countries completed the airport privatization and it is

SENGUTTUVAN-NR085 11
projected that by 2010, another 120 airports worldwide would be included in the private sector
management.

Contrary to the worldwide trend, airports in the US are government owned and
operated. However, the government ownership and operation of US airports are considered to be
different from other countries, since there’s a substantial private sector involvement in management
decisions concerning key airport activities and facilities, investment decisions. For instance, most of
the airports major capacity expansion projects are financed by issuing revenue bonds guaranteed by
the major tenant airlines. These airlines have substantial power over the airports decision on capacity
investment, user charges and other key strategic decisions. Since the airlines in the US face very
competitive market place and they act as pressure group for the US airports to improve efficiency of
their operation (Bailey 2002 & Carney & Mew 2003). In short, airport privatization refers to change
of ownership right from public authorities to private authorities. The change in private ownership will
take in different form, viz. Contracting out, Franchising, Management contract, Leasing and joint
venture through – Built – Own – Operate (BOO), Built – Own – Operate – Transfer (BOOT),
Floatation of shares and 100.0% outright sales. Let us see the different privatization model adopted by
different airports in the successive paragraph.

Forms of Airport Privatization

Privatization of airports may occur in one of the following ways:

• Sale of a concession to a private sector entity for operating and developing a single airport
during stipulated period (20 to 50 years). (Leasing Model)

• Sale of a concession to a private sector entity to develop and operate a system of several
airports on behalf of one or more strategic investors or on behalf of the public at large as
shareholders, for a stipulated period. (Sale out 100% to Private sector)

• Sale of shares in a national airports authority to the private sector (entirely or in partnership
with the government) such that the authority becomes an entity in the private sector. (Floating
Shares in Capital Market)

• Sale of a concession to a private sector entity to develop and operate facility on a government
owned airport (passenger terminal, cargo centre etc) for a stipulated period of time, after
which ownership in the facility may avert to the state. This is typical model based on Build-
Operate-Transfer (BOT) project.

Examples of each of the above models of privatization are found at airports around the
world. Outright sale of an airport to private sector interests is the most common model, as exemplified
by the privatization of the major federal airports of Australia to Consortia of domestic and foreign
investors. Most recently, the New Zealand followed the same model for Wellington Airport and also
sold its interest in Auckland Airport to the public through a general share issue.

The multi-airport privatization is best exemplified by the longstanding UK’s

privatization of the British Airports Authority (BAA) and its seven airports (Three London airports-
Heathrow, Gatwick, Stansted, Southampton and three airports in Scotland). The third example,
privatization of an entire national airport authority with a multi-airport system, may be seen in the very
recent move to privatize the Malaysian Airports Authority through a public share offering to nationals
and foreign investors. Lastly, the privatization of major facilities at airports under BOT (Build-
Operate-Transfer) model, the third terminal at Toronto International Airport, Canada, and the Euro
hub Terminal building at the Birmingham Airport, UK are based on BOT model. Development of

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entirely new airports under BOT model is very rare, because new airports need massive capital
investments. However, two airports are following this scheme. The new Athens Spata International
airport is currently under construction by a German Consortium including Hochtief and Frankfurt
Airport Authority. This development is under the BOT concession from the Greek Government based
on the 25 year concession period. The other airport is at new Berlin-Brandenburg. This is planned to
be the international airport for Germany’s re-established capital city and this will replace three existing
airport. Construction is financed entirely by the private sector sources and the successful
concessionaire carries out operation. In India also two airports (Bangalore & Hyderabad) are planned
under the BOT model, which is completely a new brand of airport.

Different Privatization Models Worldwide

There are various forms of privatization models adopted by different countries in the
development of airport infrastructure, which are mentioned below:-

• Placement of entire shareholding (Manchester International Airport, Great Britain, UK)

• Management buyout (Belfast Airport, Great Britain, UK)
• Floatation of shares (London Heathrow International Airport, Gatwick International Airport,
Stansted International Airport (British Airports Authority), Great Britain, UK)
• Partial Floatation (Vienna International Airport)
• Sale by public tender (Stewart/ New York Airport)
• Privately negotiated sale (Naples Airport)
• Joint venture by injecting finance (Birmingham Airport, UK)
• Granting of management contracts (Pittsburgh Airport) and
• Granting of leases (Sydney, Auckland, New Zealand Airports, Australia)
• Floatation of shares (Kula Lumpur International Airport, Malaysia, first airport in the Asian
continent)

Reasons for Airport Privatization

The logic behind deregulation of airlines in 1978 is to boost the air traffic and provide
stimulus for the growth of the aviation market and the economy. Further it also enabled airports to lead
a better quality of service and make more market oriented. A new entrepreneurial approach in airport
management started after deregulation of airlines and leads to increase in Accountability; Performance
based compensation, Management expertise, Flexibility, Technology, Customer service, operating
efficiency, airport revenues, improved airport amenities, possible of generating new revenue streams
in the non-aeronautical segment and reducing risk of developing uneconomic white elephant projects.
Airlines, Passengers, Private operators and tax payers can benefit from this new approach to airport
management. Realizing the need of the hour, public authority is inviting the domestic and foreign
private investors to participate in the development of airport infrastructural expansion programmes.
Besides this, revenue generation is very vital in airport economics. Today most of the advanced and
developing nation’s airports are trying to budge from airside revenue to landside revenue through
commercialization. Governments in many cases do not have the heavy financial capacity to invest in
airport expansion on one side, and on the other side, limitation in their own knowledge and expertise
in managing airports. Such expertise can be provided by private airport professionalizes with the effect
of reducing costs, increasing revenues and improving services.

Objectives of Airport Privatization

The main objective of airport privatization is to increase competitiveness and enhance

ability to magnetize economic development by improving airport facilities and find additional air
services. The private sector increasingly has come to analysis airports as an attractive investment;

SENGUTTUVAN-NR085 13
airports serve a dynamic growth industry--commercial aviation--and represent essential infrastructure
with a near monopoly. Qualified private airport operating companies have materialized and others will
evolve, while successful public airport operators are seeking to expand to provide airport management
services--generally as part of broader investor groups. As a result, a worldwide network of airport
operators will operate substantial numbers of airports. These worldwide operators will engage in
healthy competition with each other to be efficient and offer superior services, and thus support the
objectives of the investor groups in which they participate. Private operators will try to utilize airport
land with maximum optimization in terms of market oriented approach. To illustrate the main
objective of privatization in airport infrastructure is categorized into six main factors:-

i. Sustained growth of passengers and cargo worldwide in air travel, which requires huge
investment in new infrastructure expansion.

ii. The government’s financial position on airport development is unrealized, hence private
investors are to be best positioned to exploit. Worldwide Government’s find very difficult
to finance the large infrastructure improvements of airports require to accommodate new
passengers. Latin America, South Africa and India are largely neglected for the past 25
years by public authorities need to refurbish the existing infrastructure of airports. Airport
investment estimated to reach a total of $350 billion over the next 15 years according to
ICAO. Therefore, authorities have devised the new instrument in different ways to attract
private capital for airport infrastructure investment.

iii. To improve productivity and efficiency

iv. To encourage employees as public direct ownerships shares
v. Importance in the role of Customer Orientation
vi. Business orientation to provide adequate market oriented capital projects.

Airport Ownership and Governance Models

The operating model of airport operations are slowly changing the airport industry and
bringing the role of productivity and efficiency like other industries, which are seeking the goal of
profit maximization with planned input. This activated the growth of new market in the airport
services including infrastructure development, airport management systems and partial ownership or
management contracts in the areas of ground handling and retailing. In the present and existing
scenario, airport ownership / governance models are classified into seven types adopted across
worldwide (Annexure- 1).

• Government Agency or Department operating airports directly

• Government corporation ownership / operations
• Multi-level governments form an authority to own / operate one or more airports in the
region or country.
• Government ownership but contracted out to a management authority under long term
lease.
• Mixed government –private ownership with government owning a majority share.
• Mixed private – government ownership with private sector owning a major share.
• Pure Private Ownership

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Literature on Airport Ownership Performance and Governance

Efficiency performance of privatization firm depends upon the market environment in

which the privatize firm operates. The private sector main objective is to increase economic efficiency
through proper allocative system, for instance, Private Airlines. The basic argument for private
provision of infrastructure is that the private sector is more efficient. The efficiency gains arise from
two sources. First, private managers have the incentive and capacity to make decisions that ensure the
maximum value of an asset. Secondly, the private sector can produce the output at lower costs. These
lower costs stem from a number of sources and include greater internal efficiency and productive
efficiency. Furthermore, the efficient level of capacity and technology associated with private sector
ownership / management will also lower costs. The ownership performance and governance of private
sector participation in airport infrastructure are analyzed worldwide through different studies made by
airport professionals and research scholars to substantiate the efficiency of private ownership on
Investment capacity, Productivity and Cost Efficiency.

Investment capacity is more likely to be an efficient level under a privatization scheme.

In Canada, over investment in capacity at Mirabel and Calgary airports was a direct consequence of
the Federal government making investment decisions on political grounds and attempting to maintain
a national standard. The fear that private sector will fail to invest and will simply exploit existing
capacity. But this assumption was failed because the investment made by BAA plc has doubled in the
three years following privatization. For instance, at Heathrow, $ 440 million is being spent on a rail
project to link the airport with downtown London, if this project completes, the trip will be cut from
one hour to fifteen minutes. At lease-managed airports, an investment has shown growing drastically.
Morristown airport at New Jersey has undertaken continuing investment in runways, terminals and
ancillary services since being leased in 1982. A similar situation has occurred at Teterboro Airport,
under lease since 1970 (Ashford and Moore 1992).

An analysis of both BAA and Lockheed air terminal has provided evidence that
productivity, both nominal and in real sense markedly. A cost comparison of federally owned and
operated airport Yarmouth NS and a municipally owned airport, Oshawa, ON provides remarkable
evidence that local ownership leads to substantially lower costs (Hamilton G, 1991). Edmonton
International airport, now operating under a local airport authority achieved a 25.0 per cent reduction
in operating costs in the first full year of operations relative to when it was owned and operated by the
Federal government. Hirsh horn (1992) study report discloses the Canadian federal government owned
14 airports entire operations have been contracted out to private firms. As result of this, the operating
costs tend to be lower and that contract airports utilize their resources more efficiently.

Hickling’s study (1990) analyzed two federally operated airports in Quebec found that
the two privately managed airports has substantially proven lower costs, which has attributed to the
increased freedom and flexibility of private managers. Parker (1999) measured a technical efficiency
of BAA Plc before and after privatization, quoted as a principle study measuring the effect of
privatization quantitatively, Ito, (2001). These studies show the technical efficiency of BAA Plc by
DEA (Data Envelopment Analysis) using time series data. However, the result revealed that no
remarkable changes in technical efficiency found before and after privatization. Later on, Muneki
Yokomi (2000) study used Malmquist Index and prepared a set of panel data, to analyze the two kind
of measurement i.e., (Aeronautical and Non-Aeronautical). This study revealed that there is an
improvement in technical efficiency after privatization. It is a significant factor in terms of consistency
with the theorem of privatization. We can see the Yokomi result from his table below:

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 Annexure – 1

Airport Ownership & Governance Models – Worldwide

Airports Airport Code Region O & G Model

Indianapolis International Airport IND N America Private / Authority
Copenhagen Kastrup Intl Airport CPH Europe Private Majority
Flughafen Düsseldorf Intl Airport DUS Europe 50-50 Govt. / Pvt. Co
Leonardo da Vinci Intl Airport FCO Europe Private Majority
London Gatwick Intl Airport LGW Europe Private Majority
London Heathrow Intl Airport LHR Europe Private Majority
Manchester Intl Airport MAW Europe Private Majority
Vienna Intl Airport VIE Europe Private Majority
Zurich Intl Airport ZRH Europe Private Majority
Auckland Intl Airport AKL Pacific Private Majority
Melbourne Intl Airport MEL Pacific Private Majority
Sydney Kingsford Intl Airport SYD Pacific Private Majority
Cochin International Airport Ltd COK South Asia Private Majority
Atlanta William H.B.Intl Airport ATL N America Government Dept.
Detroit Metropolitan W.C.Airport DTW N America Government Dept.
Honolulu International Airport HNL N America Government Dept.
Houston-Bush Int-Cont Airport IAH N America Government Dept.
Los Angels International Airport LAX N America Government Dept.
Miami International Airport MEM N America Government Dept.
Chicago O’Hare Intl Airport ORD N America Government Dept.
Singapore Changi Intl Airport SIN Asia Government Dept.
Dallas / Fort Worth Intl Airport DFW N America Authority
Washington Dulles Intl Airport IAD N America Authority
New York JFK Intl Airport JFK N America Authority
Vancouver Intl Airport YVR N America Authority
Bangkok Intl Airport BKK Asia Authority
Hong Kong CLK Intl Airport HKG Asia Authority
Seoul Gimpo Intl Airport SEL Asia Authority
Mumbai Intl Airport BOM South Asia Authority
Paris CDG Intl Airport CDG Europe Public Corporation
Geneva Cointrin Intl Airport GVA Europe Public Corporation
Osaka Kansai Intl Airport KIX Asia Public Corporation
Oslo Airport OSL Europe Public Corporation
Incheon Intl Airport ICN Asia Public Corporation
Shanghai Pudong Intl Airport PVG Asia Public Corporation
Dublin Intl Airport DUB Europe Public Corporation
Minneapolis St. Paul Intl Airport MSP N America Public Corporation
Amsterdam Schiphol Intl Airport AMS Europe Government majority
Brussels Intl Airport BRU Europe Government majority
KL Intl Airport KUL Asia Government majority
Beijing Capital Intl Airport PEK Asia Government majority
Source- Air Transport Research Society 2003 (ATRS)

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Measurement of Aeronautical activities

Airports Before Privatization After Privatization

Heathrow 0.270 0.337

Gatwick 0.340 0.335
Stansted 0.144 0.384
Glasgow 0374 0.466
Edinburgh 0.388 0.593
Aberdeen 1.000 1.000

Measurement of Non-Aeronautical (Commercial) activities

Airports Before Privatization After Privatization

Heathrow 0.996 0.993

Gatwick 0.867 0.925
Stansted 0.443 0.552
Glasgow 0.477 0.612
Edinburgh 0.356 0.496
Aberdeen 0.451 0.537

From the above Yokomi’s Malmquist Index table, there is clear evidence that after
privatization, BAA Plc (Six airports) has showing efficiency and improvement in the aeronautical and
non-aeronautical (commercial) activities. This study clearly indicates that airport privatization has
impact in technical and performance efficiency of the airports, which really experience the model.
Sarkis (2000) assessed the operational efficiency of US airports and attained the conclusion of the
study that major hub airports are more efficient than spoke airports. Since, the US airports are partially
privatized; hence the efficiency is higher in the major hub airports. Advani and Borins (2001) revealed
the airport service quality from 201 airports across the globe and found that privately operated airports
are tend to provide better services as compared to other ownership airports.

Global Trend in Airport Privatization

The worldwide trend towards airport privatization presents a stimulating and vibrant
opportunity for the travelling public, governments, operators and investors. The by and large success
of airport privatization has been seen by the sale of long-term lease (99 years) for three of the largest
airports in Australia for $2.6 billion. Following this success, the Government of Australia announced
their plans to privatize fifteen more airports. Several Latin American airports already are in private
hands. Major airports in Argentina, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela
are already listed for privatization over the next two years. Smaller airports in Central America and the
Caribbean are also in the line of privatization. In Europe, significant numbers of airports have been
privatized and opportunities are imminent in Germany, Portugal and elsewhere. Governments in
Southeast Asia, Africa, and South Asia are also developing airport privatization plans.

The main goal of this privatization issue is to increase competitiveness and enhance
ability to attract economic development by improving airport facilities and obtaining addition air
service. Apart from these goals, a major outcome would help the industry in acquiring Accountability;
Performance based compensation, Management expertise, Flexibility, Technology, Customer Service,
Cost-Effectiveness and responsiveness in their business performance. Expenditure on airport
infrastructure leap dramatically since 1994 and expected to expand further as a result of considerable

SENGUTTUVAN-NR085 17
influx of private money induced in aviation sector to overcome the scarce capacity. The total
investment on airport development projects globally estimated to be around US $ 425 billion (Jane’s
Report, 2000). This vast majority of high investment is a reflection of massive air traffic growth,
which created a scarce capacity holding, and this has made new building programmes worldwide.

In Asian region especially Far East countries are attempting to meet the demands of
above world average traffic growth, matching with the strong performance of the region’s economies.
It is evident that China is rushing to provide an additional airport capacity, where 40 substantial
upgrade and new airport developments were planned in response to recent annual growth figures
around 20 per cent and projected levels averaging at least 12 per cent by 2010. China airport
authorities projected that the country will be handling 200 million passengers by 2006 from 100
million passengers in 1995. This high level of investment is being caused by above average to / from
and within the Asia Pacific region. The region as a whole could account 35 per cent of the total
projected investment. Europe is baffling against environmental issues, which are the main constraints
for growth in the aviation infrastructure. Russian states are struggling to reverse sharply falling traffic
trends and relying principally on loans and gifts from donor agencies merely to keep their
infrastructure from further deterioration. African region are also continues to struggle to keep its
infrastructural operational. The growth of aviation sector in the middle-east region is more affluent and
accounts 10 per cent of the world traffic, which unlikely to change much in the coming years.

Table -3
Global Estimated Investment in Airport Expansion & Improvement
(US $ in Billion)
Regions Investment Percentage
Africa 005.0 01.2
Asia-Pacific 150.0 35.0
Europe 080.0 18.8
Latin America & the Caribbean 075.0 17.6
Middle-East 010.0 02.4
North America 100.0 23.5
Total 425.0 100.0
(Source – Jane’s Information group, May 1999 Edition)

The above table (Table-3) reveals that the total airport investment for expansion and
improvement will add a cost of US $ 425 billion. Asia Pacific region is at the top of investing in
airport expansion and improvement with a total cost of US $ 150 billion accounting 35.3 per cent of
the total world airport expansion / improvement investments up to 2010. The reason for more outlay at
this region because the air travels at this region is growing dramatically at the rate of 7.5 per cent
annum, which is more than the world average growth of 4.5 per cent in the air traffic. North America
and Latin America both accounts 41 per cent in airport expansion and improvements investment costs,
which is totaling to US $ 175 billion. America’s major airports contribute 40 per cent of the world air
traffic and it predicts that the air travel will soar at an average growth rate of 4 per cent per annum.

To meet the terminal scarce capacity holding of airport infrastructure the authorities
estimated and allocated the investments to meet the air traffic demand through terminal expansion and
improvements worldwide. European region is also expanding and improving the airport infrastructure
to meet the future demand at a cost of US $ 80 billion that is 18.8 per cent from 1999 to 2010 period.
The remaining regions Africa, Russia and Middle East are accounted only marginal investment in
airport expansion and improvement accounting US $ 5 billion each and US $ 10 billion which in term
of per cent 1.2 (Africa & Russia) and 2.4 per cent during the period of 1999 to 2010.

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Private Players, Approach and Planning

Most of the countries are becoming much more methodical in privatization process
because there have been some overly optimistic frays. The biggest players in international airport
privatization today are the UK’s British Airports Authority Plc (BAA), Aeropuertos Espanoles Y
Navegarion Auea (AENA) of Spain, the Dutch Airport Group Schiphol, Aeroports De Paris, Ireland’s
Aer Pianta International, Germany’s Hochtief Airport GmbH, Milan Airport, Rome Airport and
Copenhagen Airport. European companies have taken the lead in international privatization business
ventures making it predominantly a European business. There is one major US company which
already has been existing in the international airport privatization field is Ogden Corporation, which is
disposing of the aviation and entertainments elements of the corporation to focus exclusively on its
energy business. Ogden had scored one of the biggest privatization companies with the reward of 30
year license to operate Argentina’s 33 national airports. The winning consortium included, Ogden,
Corparacion America Sudamericana SA and Societz Eserlizi Aeroportualli SEA. The approach
towards privatization arrangements is based on “Flexibility” and its each project is unique. In some
cases, formation or joined consortia to bid for airports, with the local and financial partners. For
example, BAA plc takes either minority shareholding of the airport or simply a management contract.
The major problems experienced in common airport privatization ventures are insufficient planning on
the part of the government. Many problems would crop up and leading to lack of planning which
might cause failing to organize an economic regulatory body to oversee ratemaking or neglecting to
establish a process to ensure that the winning bidder has the necessary ability to manage the project.
Government may also fail to sufficiently define their expectations in the bidding process and in the
contracts. Most importantly, certain parameters related with pricing, operational, safety, security and
service provision should be planned for private operators in order to maintain the world standards.

Airport Economic Regulation

The primary must be given priority in framing regulatory authority before

privatization takes; this will give a clear master print on economic regulation of airports in revenue
generation. For instance, UK’s Civil Aviation Authority (CAA) framed a rule that all airports with
more than £ 1 million turnover a year are subject to economic regulation, which is limited to
aeronautical activities. In practice, detailed economic regulation of aeronautical charges is effected
only for the three London airports of the BAA Plc (Heathrow, Gatwick, and Stansted) and at
Manchester. Additionally, the UK government has reserved the powers to impose condition on the
private airport operators as is deemed necessary in order to comply with the international treaty
obligations, such as Article 15 of the Chicago Convention and in matters of national security. For
further reading please refer (Monopolies & Merger Commission, BAA Plc, A Report on the Economic
Regulation of the London Airports Companies (Heathrow Airport Ltd, Gatwick Airport Ltd, Stansted
Airport Ltd) Civil Aviation Authority, London, UK, 1996).

Airport Pricing Policy or Method for Fixing Price Regulation in Privatized Airports:

Airport price regulation around the world is done on the single till method and until
recently Australia has also used this method. Single Till pricing is based on the total costs of the whole
airport, with no distinction between aeronautical and non-aeronautical services. An appropriate rate of
return on all assets that are used for the provision of all services at the airports is determined. After the
total costs are calculated, prices are then determined as a residual to meet a rate of return for the
airport as a whole. Referring the UK CAA has authority to impose airside and landing charge and has
the power to impose price controls in order to prevent abuses, unfair discriminatory pricing and
landing rights discrimination. In the areas of landing charges, the CAA has reserve powers and co-
shares competition regulation responsibilities with the Office of Fair Trade (OFT). The Monopolies

SENGUTTUVAN-NR085 19
and Mergers Commission (MMC) is required to investigate report and recommend on the level of and
increase in airport charges that could be levied during a five year period. In the light of the MMC’s
recommendations, the CAA can modify the conditions imposing the price formulae. Price regulation
takes in the form of PRICE CAP applied to revenue deriving from airport charges per passengers.
CAA stipulates the acceptable level of change in the aeronautical charges in terms of a formula related
to the changes in inflation as measured by the Retail Price Index (RPI). This is then known as the RPI
– X formula. X is an efficiency factor which allows for the fact that there are economies of scale in
airport operations. Therefore the cost of handling each passenger goes down as traffic increases. BAA
enjoys a considerable degree of market power.

Price cap regulation according to the RPI-X formula has been a key element in the
field of regulatory reform in Great Britain. This system encompasses a pricing structure subject to
specified maximum fare increases, expressed in terms of percentage that cannot exceed the difference
between the RPI and a given factor X. This index is preferred to an industry specific because the
regulated firm cannot manipulate it. The time period for this index is 5 years, after which prices are
revised. Regulators of fares through an RPI-X mechanism applied to generate revenue from airport
charges implies that revenue per passenger should not exceed a given maximum value determined by
the following equation:

Mt = (1+ (RPIt – Xt) / 100) Yt-1 – Kt

Where Mt: is maximum allowable revenue per passenger for year t.

RPIt = % age of change for the retail price index between years t and t-1

Xt = factor “X” in year t

Y t-1 = Revenue per passenger in the year t-1

Y t-1 = (1 + (RPI t-1 – X t-1) / 100) Y t-2 + S t-1

Where S t-1 is the allowable security cost per passenger in the year t-1. It corresponds to 95.0% of the
annual equivalent.

K t = correction factor per passenger applied in year t (whether + ve or – ve value). It can be obtained
through the formula

Kt = (1 + I / 100) 2 (T t-2 – (Q t-2 x M t-2) / Q t-2

Where T t-2 = Total Revenue coming from airport charges in year t-2

Q t-2 = Passenger Volume in year t-2

M t-2 = Maximum allowable Revenue per passenger for year t-2

I= If K t > 0 => I = SR + 3 %
If K t < 0 => I = SR

SR = Specified Rate is the average of discounted rate for public funds expressed as a percentage. This
value is published by the Central Bank of the country during 12 months periods, starting at the
beginning of period say financial year (April of year t-2 till the end of March year t-1)

SENGUTTUVAN-NR085 20
 This pricing formula was formulated and used by BAA Plc for airport charges which
were regulated by the CAA in UK. Later on, this formula was adopted and used by other airports
worldwide to determine the airport charges, which opted for privatization.

Quality and Service Regulation in Airport Industry

An airport that faces a regulated price will try to reduce its costs in order to get a
higher profit margin. Hence, elements related to quality of service must be closely supervised. In
general, quality regulation is needed to overcome the problems of inadequate or incorrect information
being available to airport users, both airlines and passengers. This problem is acute where services are
provided on a monopoly basis. Regulators, however, face similar asymmetric information problems
regarding product quality. In practice, regulators can undertake quality assessments at airports by
either understanding quality surveys or by establishing standards and measuring performance. Quality
surveys should be conducted on regular basis to assess the airport services and know the satisfaction
level of airport customers. An alternative approach should be used for comparison purpose from
similar airports to set minimum standards. This would help the airport industry in assessing the quality
performance and create benchmark in the airport services. In considering the quality of services as a
key part of the quinquennial reviews of airports are under the concerned regulatory authority. The
reason for a formal review of quality of airport services arise because airlines are concerned with
economic regulation of the form RPI – X, without any relationship between prices and performance
standards, this might give airports the incentive to improve profits by lowering standards. Therefore,
the quality and service of airports are to be viewed strictly in regulating the airport services to the
private operators. The most important outlook on privatization strategy aims at-
• Airport Management to serve the needs of airlines and travellers
• Retail business to generate revenue and enhance the travel experience
• Property to capitalize on their assets and provide services to airport users

Global Case studies of Airport Privatization

A) UK - British Airports Authority - BAA Plc

BAA is the world’s largest commercial operator of airports. It owns and operates
seven airports, viz. Heathrow, Gatwick, Stansted, Glasgow, Edinburgh, Aberdeen and Southampton.
These airports handle 71.0 per cent of UK air passenger’s traffic and 81.0 per cent of airfreight.
BAA’s core skills include project management, retailing and property development and management.
The company has 500,000 shareholders with a turnover of £ 1.4 billion. Its capital value amounted to £
6.0 billion and the company has a profit of £ 440 million and above. BAA is one of the UK’s principal
developers of infrastructure and one of the largest clients for the construction industry. It is presently
managing 100 separate construction projects to improve airport facilities at any time, of which the
largest is the construction of Fifth terminal at Heathrow.

BAA manages all commercial facilities at the airports, including shops, restaurants,
bars, bureaux de change and car park. More than 200 companies have retail contracts, including many
of the worlds leading brands. In 1987, the BAA was sold off as single company owning seven airports
including London’s three airports. Privatization has freed the BAA from financial constraints; it is
now able to fund its development using normal commercial sources. It also freed the government from
financing and started airport development from its own fund or borrowings. As a private company it
has the freedom to expand the scope of its activities. The BAA Plc diversified their management after
privatization. Apart from its UK airport operations, BAA is involved in property management, an off
airport retailing joint venture and international airport activities. It began developing three hotels on its
own land. In February 1990, it opened its first hotel at Ghent in Belgium. Its three airport hotels, one
at each of its London airports, opened in the second half of 1990’s. The company also expanded in air

SENGUTTUVAN-NR085 21
cargo business at its airports by buying a freight forwarding company. BAA also managing overseas
(International) business and took over the management of the Indianapolis airport system during 1995,
the first overseas airport management contract for 10 years and with a retail concession contract at
Pittsburgh in 1992, both in United States. Further BAA is aiming to gain exposure in the US market.
BAA has a 49.0 per cent stake in Australia Pacific Airports Corporation (APAC).

B) Pacific Region (Australia) Airports Privatization

The biggest news was sale of Sydney Kingsford Smith airport in 2003. The winning
bidder was Southern Cross Airports Corporation, paid US $ 3.0 billion for the 99 year lease agreement
to Sydney international airport. Southern Cross is a consortium led by Macquarie Bank and Hochtief
Airport. The acquisition is being financed by a combination of debit and equity. Debt providers
include Commonwealth Bank, Barclay’s Capital, Royal Bank of Scotland, Societe Generale and
Fliers. The equity investors are Macquarie, Hochtief, Ferro vial Aeropuertos, Abbey National Treasury
Services, Ontario Teachers Pension Plan Board and the Motor Traders Association of Australia
Superannuation Fund. Indeed, a public float was in prospect for rival Melbourne Airport, Australia’s
second largest airport. The 99-year lease to Melbourne airport was acquired in 1997 by Australia
Pacific Airport Corporation, a consortium led by BAA. The purchase price was Aus $ 1.307 billion,
but the airport estimated market value is now put at Aus $ 2.3 – 2.4 billion, some of which would be
paid down from the proceeds of the estimated Aus $ 1.2 billion share offering. Auckland city council
voted in join to sell it 25.7 per cent stake in Auckland international airport in order to unload its share
of the airport debt. The New Zealand government sold its 51.6 per cent stake in the airport in 1998 via
public share offering.

C) Asian Region Airports Privatization

Airports in Asian region started revamping airport management by bringing private

sector management in the airport infrastructure development. Most of the countries in Asia are Japan,
China, Korea, Singapore, Malaysia, Thailand, India, Pakistan, Bangladesh, Sri Lanka, Nepal, Vietnam,
Philippines and others started planning to privatize airports in their country’s . The main reason for
privatization was in the need of huge capital to expand airport terminals and provide facilities at par
with world class airport standards. This will in turn attract FDI towards country’s economic
development through trade and tourism. Asian economy is growing very fast with 4.8 per cent in GDP
growth as compared to world average of 2.8 per cent in GDP. ICAO projected that Asian air traffic
would grow at the rate of 7.0 per cent in the years to come. In order to hold 7.0 per cent growth in
Asian air traffic, airport expansion is necessary. Therefore, governments in Asian region are in favour
of opening the door for private capital in the development of civil aviation sector.

India: The Indian government plans to proceed with privatization plan at its four largest airports –
New Delhi, Mumbai, Chennai and Calcutta. The green field projects at Bangalore and Hyderabad on
Build Own Operate (BOO) basis. The government is working on the airport privatization in two
phased manner. In the first phase, Mumbai and Delhi airports will be worked out for private
participation in order to improve the service quality at par with international standards. In the second
phase, Chennai and Kolkata airport may go for private sector participation. Apart from these airports,
government is interested in privatizing the major 10 non-metro airports (Goa, Guwahati, Calicut,
Trivandrum, etc.)
D) Russian Airport Privatization Scenario

Russia has 756 airports operating in the Russian Federation. During the short span of
five years (1992-1997) 476 local airports closed due to decline in air traffic and scarcity of capital for
airport upkeep. Many regional airports operate at a fractional of their capacity and have excess space.
Moreover, airports lack capable management to commercialize the available facilities. The airport

SENGUTTUVAN-NR085 22
facilities are poorly equipped and the service does not meet international standards. On the other hand,
with increased international traffic, Central Russia’s international airports have reached the limit of
their capacity and looking for funds to finance expansion. For example, the European Bank for
Reconstruction and Development (EBRD) has approved $ 156 million loan for the construction of
Pulkovo-3 airport at St.Petersberg (tender awarded to the Swedish Company Skanska); East line
sponsors the construction of the new terminal in Domodedovo airport in Moscow to increase airport
capacity to 2.5 million passenger’s a year; Samara airport Kurumoch conducts negotiation on
approximately $ 675 million investment into the overall reconstruction that would turn into an
international hub; the EXIM Bank of Japan approved $ 70 million loan to extend the runway,
construct a new navigation and control tower and upgrade the terminal at Yuzhno-Sakhalinsk airport.

The privatization of Russian airports continues and thirty one out of sixty three
Federal airports have already been privatized. The government share exceeds fifty one (51.0 per cent)
in fifteen airports. Federal Aviation Service of Russia (FAS) the state property Committee has
announced share of six largest airports (Sheremetjevo, Syvtyvkar, Koltzovo (Yekaterinburg),
Vnukovo1, 2 and Domodedovo will be sold. The privatization is complicated because ninety six
airports are still part of the old structure. Airports are operated on old economic principles; these
airports barely survive without the government subsidies. Of sixty three federal airports, twenty-one
have emerged as separate administrative and financial units; forty federal airports operate under
aviation enterprises; the perm airport is going through the process of separation. As international cargo
and passenger traffic is growing in Russia, airports in major cities come under increasing pressure for
more space and better service. The four largest airport hubs (Sheremetjevo, Domodedovo, Bykovo and
Vnukovo) in the country has large volume of traffic with over 500 flights to 147 towns of Russia, 259
flights to 122 foreign countries, 27.0 percent of traffic, 17.0 per cent of air cargo and 74.0 per cent of
all international traffic. It is also expected that the gradual revival of the Russian economy will result
in high intensity short and middle distance air travel and freight, which will place additional, demands
on the existing airport facilities. The comprehensive programs for developing airports call for
immediate measures to increase airport capacity renovate and expand passenger and cargo terminals,
additional runways, hangars and warehouses, optimize take-off and landing schedules and develop
airport infrastructure. The implementation of these plans relies fully on the results of privatization,
government guarantees on investment of major airport construction projects and identifying potential
financial sources.

US’s Airport Privatization Scenario

Airport privatization has become a hot issue not only in America, but around the
world. In fact developments in other countries are threatening to leave the United States back in the
clouds. Across the Atlantic, the US government is taking a more cautious approach to privatization,
but larger changes are expected very soon. In 1996, Congress authorized a two year privatization pilot
programme which allows the Department of Transportation to grant exemptions from certain federal
statutory and regulatory requirements for up to five airport privatization projects. Latin America and
the Caribbean countries have joined the privatization programme and most of the airports are holding
private sector participation. In Mexico, 35 airports are in the privatization programme. International
privatization projects programme are undertaken at Mexico main airports to privatize 35 facilities in a
phased manner. The Southeast group consisting of 9 airports, the pacific group with 12 airports and
the north central group consisting of 13 airports has already been awarded. The privatization strategy
selected by the Mexican government principally involved public equity offerings to promote the
participation of a wide range of investors.

SENGUTTUVAN-NR085 23
6. Airport Privatization in Developing countries (1990-2001)

Airport privatization has become sizzling topic around the world. Governments
around the world in both developed and developing countries are turning to the private sector for
airport management and development in order to improve airport operations in several ways through
efficiently. So, let us see the airport privatization in developing economies during the last one decade
its development and shape in the economy. Thirty-five developing countries started private
participation in airports from 1991 to 2001, granting 82 projects involving 224 airports. Private
curiosity in the airport sector has been stimulated by the growth of air transport and airport revenue –
intensified and fueled by deregulation and “Open skies” agreements among countries.

Investments in airport projects with private sector participation move up from zero to $
US 12.5 billion in 2001. This was impelling mainly by the concession of the airport system in
Argentina. Concessions subjugated private activity in airports accounting 76.0 per cent of the
investments and 49.0 per cent of the total projects from 1990-2001. Most of the developing countries
are opting for concessions rather than divestment, since airport assets are tend to be strategic for
national security. Divestment in airport infrastructure investment attracted only 15.0 per cent share
over the period. Airport divestment is taken into different forms. Seven of the 16 (Sixteen) divestures
– in Bolivia, The Russian Federation and South Africa introduced private management through the
sale of controlling stakes. In China, Malaysia and Poland state-owned enterprises used public stock
offering (PSO) to raise funds for rehabilitant and expansion of airports and continue to operate the
facilities. The 19 Greenfield airport projects attracted 8.0 per cent of the investment in 1990-2001.
Management and lease contracts were very rare, involved only two projects in Colombia and one each
in Cuba and India. Latin America and the Caribbean led the regions in airport private participation
accounting 57.0 percent of the total investment and 32 projects during 1990-2001. Concessions were
the major type of private participation in airports in Latin America. East Asia and Pacific was ranking
second with most active region accounting 21.0 per cent of the investments in airport projects with
private participation. Of the 17 airport projects in the region, seven were in the divestures accounting
for almost half the investment. The table given below will illustrate the share of private participation
in the airport infrastructure by the developing economies during 1990-2001.

Table – 4
Region-wise Cumulative Investment in Airport Projects with Private Participation in
Developing Countries – (1990-2001)
Regions Countries No of Projects Investment Percentage
(no’s) (in $ Billion)
East Asia & Pacific 07 17 2.63 21.0
Europe & Central Asia 06 14 1.50 12.0
Latin America & Caribbean 12 32 7.13 57.0
Middle-East & North Africa 02 07 0.75 06.0
South Asia 01 02 0.13 01.0
Sub-Saharan Africa 07 10 0.38 03.0
Total 35 82 12.50 100.0
Source – World Bank, PPI Project Database

SENGUTTUVAN-NR085 24
 Figure – 3
Region-wise Cumulative Investment in Airport Projects by Private Participation in Developing
Economies
Region-wise Cumulative Investment in Airport Projects by Private
Participation - (1990-2001)
South Asia
($ 0.13 Billion)
1%
Sub-Saharan Af rica
Middle-East & N Af rica ($ 0.38 Billion)
($ 0.75 Billion) 3% East Asia & Pacif ic
6% ($ 2.63 Billion)
21%

Europe & Central Asia

($1.5 Billion)
12%

Latin America &

Caribbean
($ 7.13 Billion)
57%

Table – 5

Private Participation in Airports Major Areas – (1990-2001)

Major Areas Number of Projects Investments (in US$ Billion)

All Facilities 54 10.1
Terminals 26 01.9
Runways 02 00.5
Total 82 12.5
Source – World Bank, PPI Project Database

Alternative Airport Privatization Models suggested for Developing Economies

The core of airport services are natural monopoly activities, so that a framework of
economic regulation is required to limit the abuse of a dominant position, irrespective of whether the
facility is publicly or privately owned. However, there is now ample experience worldwide of natural
monopoly utility assets being owned and operated by the private sector business within a framework
of economic regulation. There’s an increasing evidence that privatized provision combined with
incentive compatible forms of regulation, based on the price cap approach, offers superior
performance outcomes (lower prices and improved service quality as well as improved profitability)
compared to service provision by state-owned enterprises. The study discusses alternative models of
PSP in airport and ATC activities ranging from complete or almost completes privatization through
floatation or trade sale to more restricted forms of management contracting. Complete privatization is
proposed as an appropriate target model, but it is recognized that this approach works best within a
relatively sophisticated regulatory framework involving not only an appropriate legislative framework
but also a wider set of conditions covering the conduct of economic regulation. A recent National

SENGUTTUVAN-NR085 25
Economic Research Associates (NERA) report to ADB indicates that current regulatory system in
most Asian DMCs fall short of international best practice. In this situation, more restricted forms of
PSP may provide appropriate means of extending the role of the private sector in airport activities. The
key features of alternative models of PSP are

• Full Privatization
• Partial Privatization (Concessions, Strategic partnerships and Management contracts).

Full Privatization:

Full privatization involves the transfer of ownership of airport assets from a public
corporation to private investors through floatation or through a trade sale. Following privatization, the
privatized entity is fully responsible for operating the airport facilities, directly or through agents /
concessionaires and for financing investments in airport assets internally, from retained earnings or
externally through the issue of new equity or debt. The first example for full privatization is UK’s
BAA Plc. Outside UK the most far reaching privatization program has taken place in Australia
through long term leases for 50 years, were offered for sale over 18 of the 22 airports operated by the
Australian FAC in a two phase sales program. This model was followed by only few countries, which
are well developed in the aviation industry. If this model is adopted by any developing economies,
then the authority or government should go through history of BAA Plc and needs a massive
homework for forming a regulatory body to take care of pricing and quality in the airport services
before going to adopt this model of full privatization.

Partial Privatization:

Partial privatization refers to limited role of private sector participants in operating the
airports via Concession or Build-Operate- Transfer (BOT), Strategic partnership and Management
contracts. The comparative absence of full privatization based on two interrelated factors viz.

• First, government reluctance to cede control over what at least in the major capital city
airports is widely regarded as vital national assets.

• Secondly, the lack of an appropriate framework of economic regulation and regulatory

governance to balance the interest, short and long term, of consumers and investors, given the
highly immobile and long lived character of airport assets.

These two factors combine to encourage forms of PSP based on long term contracting
or public-private partnerships, in which the contract or partnership mechanism acts, first to secure
investment in airport infrastructure sought by the government partner and second to protect the private
investor against arbitrary or opportunistic behaviour by government. Let us discuss the case studies of
few developing countries adopting partial privatization programme.

Concessions:

The large majority of actual cases of private sector privatization in airports involves
concession contracts, under which control of some or all core airport assets is transferred to a private
investor, who is responsible for financing investment and operating the airport for the term of the
concession, typically for 25-30 years. The precise extent of the private sector operators’
responsibilities varies. In some cases, the concession agreement may cover financing and operation of
all airport assets; in other words, the concessionaire may only be responsible for financing and
operating a particular facility, such as passenger terminal or runways, alongside the incumbent public

SENGUTTUVAN-NR085 26
sector airport operators. We can see the case studies of two airports concession projects in developing
economies.

• Abidjan Hophouet-Boigny Airport, Cote d’Ivoire

• Ninoy Aquino International Airport, Philippines

Abidjan Hophouet-Boigny Airport, Cote d Ivoire (AERIA):

The operation and development of AERIA was transferred through a 15 year

concession agreement signed on July 1996 between the Government of Cote d’Ivoire and AERIA, a
special company controlled by Societe d’Exploitation et de Gestion Aeroportuaire (SEGAP), a jointly
owned subsidiary of the Marseilles Chamber of Commerce and Industry (MCCI) and Groupe Sofrevia,
a French Aviation Services company. MCCI operates Marseilles airport, SEGAP also operates
Libreville (Gabon) airport under a 30-year concession agreement signed in 1998. Under the
concession agreement, AERIA committed to a four-year investment program, covering a major
expansion of the international passenger terminal and associated parking apron and taxiways areas
together with runway reinforcement and extension and also aimed to expanding airport capacity to 1.7
mppa. AERIA will finance the investments from airport users charges and other airport revenues. It
will also pay concession fees to Ivorian authority amounting to approximately 20.0 per cent of
turnover, largely to finance the operation of unprofitable interior airports in Cote d’ Ivoire.

Philippine’s Ninoy Aquino International Airport (NAIA):

Philippine International Air Terminal Company Inc. (PIATCO), has been selected as
concessionaire to construct and operate a new international passenger terminal over a 25 year
concession period. The Manila International Airport Authority (MIAA), a public corporation will
continue to own and operate other airport assets, including the two existing passenger terminals and
runways. Under the concession contract, PIATCO will be able to increase international passenger
charges (levied on airlines) from the initial level determined by the Ministry of Transport and
Communications in line with a pre-determined formula. PIATCO will also pay a two part concession
fee to MIAA, consisting of a sum fixed in real terms, and a variable fee, expressed as a proportion of
total revenues from international passenger charges and other commercial activities. This two-part
structure introduces a degree of revenue sharing risk into the agreement.

Strategic Partnership Model:

Under the strategic partner model, a private sector firm or consortium acquires a stake
(typically a minority shareholding) in a state owned airports operator. Proposal for re-structuring the
Airports Authority of Thailand (AAT) via a strategic partnership are currently being considered by the
Thai government. The other example is South African airport authorities are also following the same
model by offering a minority stake in the South African Airport company to strategic investors, as a
possible step towards full privatization. In Thailand, it is expected that, apart from taking an equity
stake in the restructure airports operating company, the strategic investor will also be awarded a
management contract covering the operation of a range of airport ancillary activities, such as internal
telephone systems, car parking and aircraft maintenance facilities. Strategic partnerships provide a
vehicle for introducing private sector finance and operational expertise in order to directly relieve
public financing constraints and to improve operational and financial performances. Another form of
partial privatization occurs when minority stakes in state-owned airports are sold to private investors,
usually through floatation. This approach has been followed by Vienna Airport (Austria) and in
Copenhagen Airport (Denmark). The incumbent management, and through its power to appoint top
management, the state, retains control of business, but the conduct of the business is exposed to a

SENGUTTUVAN-NR085 27
measure of external capital market discipline. As with strategic partnerships, this may be the precursor
to eventful privatization.

Management Contracts:

Under the management contract model, a private sector contractor is retained to

manage airport assets, usually passenger terminal facilities or retailing activities within passenger
terminals. The airport owner undertakes other airport operational activities; such as maintenance and
operation of runways and ATC facilities or other state owned agencies. This model enables the private
sector contractor to transfer best practice across a range of airport activities, and thereby reducing
costs, enhancing revenues and improving quality standards of services. Responsibility for funding
investment in airport assets is retained by the airport owner, but the prospects for more wide-ranging
types of privatization may be greatly improved by the increased profitability of the business under the
management contract. Public airport authorities in OECD countries have exclusively applied this
model as a means of improving service quality and the financial performance of the airport. In
developing countries, the stimulus to engage the private sector is more frequently related to securing
an additional funding for investment projects and for gaining the benefit of private sector skills in
project management.

Comparison of Full and Partial Privatization:

In the given current political environment and regulatory practice, full privatization of
airport is not feasible in the developing economies, unlike the airports in UK and Australia operates.
The regulatory practice in developed economies is very much suitable and this moves closer to
international best practice. To substitute this, contractual mechanisms might work for economic
regulation in developing economies with unexpected market developments. The presence of an
effective regulatory governance framework increases competition for the market and also improves the
performance under contracts. If we compare full privatization with partial privatization, partial
privatization has certain adverse effects on the performance of the service provider due to the
following features.

• Weaker incentives to invest and innovate, because it’s time-limited nature which in turn
restricts the scope and benefit.
• Higher transaction costs
• Restrict to respond flexibly to unexpected market developments
• Inflated costs

By overseeing these various models, developing economies should go for strategic

partnership model, since, public – private work jointly for better performance in the quality and
profitability. In line with this, we can justify the Private Sector Participation (PSP) in airport
privatization is unavoidable and necessary in the current economic environment of the developed and
developing economies. To substantiate this let us quote the study conducted by ICAO, 2000 from their
member countries about the nature of airport funding in the years to come.

Airport Infrastructure Funding

Airport Infrastructure fund is generated through various sources namely, (Self finance,
Government, Municipal / Local authorities, Foreign aid, Banks and Portfolio) for the development of
Airports and Air Navigational Services. ICAO projected, Airport and Air Navigational Service (ANS)
requires $ US 300 billion by 2010, signifying the challenges in the area of financing airport and ANS
managing bodies would be facing in the years to come. The study carried out by ICAO (2000)
highlights the various sources used for financing Airport and ANS from 1440 major and medium

SENGUTTUVAN-NR085 28
airports in 92 contracting member states of ICAO worldwide, which they are already applied and
planned (Appended below in Table-8). The study reveals three important outcomes, namely –

(a) Self-Finance i.e. (autonomous bodies of airport which is managed and operated by the
separate body under the state control) is accounting as the largest source of financing airports
and ANS worldwide.

(b) The dependence on government financing is very stumpy as compared to other sources of
finances. This may diminish in the years to come with the incessant raise in the number of
autonomous bodies operating airports and ANS.

(c) Thirdly, an interesting new trend is emerging globally through portfolio management concepts
(Bonds & Share Equity’s) which is again a clear indication for the new organization structure.

The below table (Table-8) indicates 60.0 per cent (864) of the study airports were
already applied various sources of finances to improve and expand the passenger and cargo terminal to
meet the growing demand of air transport. The remaining 40.0 per cent (576) airports are planning to
go for various source of finance in the development of airports worldwide to accommodate the
growing traffic in their state. The major source of finance for airport infrastructure development is
applied and planned from Self-Finance and government fund which is representing 47.0 per cent of the
total, whereas the remaining 53.0 per cent of the airports are interested in applying and planning for
private finance through various sources namely – Foreign Government Loans, Development Banks
Fund, Commercial Banks (Foreign & Domestic) and Portfolio Sources (Bonds & Shares).

Table- 6

Primary Source for Financing 1440 Major / Medium Airports in 92 States of ICAO Contracting
Members
Types of Finances Number of Airports Total
Applied Planned
Self- Financing – SF 278 (32.0) 156 (27.0) 434 (30.0)
Government – G 147 (17.0) 56 (10.0) 203 (14.0)
Regional / Municipal / Govt. – RMG 30 (3.0) 12 (2.0) 42 (3.0)
Foreign Govt. Loan or Aid – FGL 42 (5.0) 30 (5.0) 72 (5.0)
Development Banks or Funds – DBF 94 (11.0) 71 (12.0) 165 (11.0)
Commercial Bank Loans
Foreign Banks – FB 79 (13.0) 82 (14.0) 161 (14.0)
Domestic Banks – DB 115 (9.0) 80 (14.0) 195 (11.0)
Portfolio Sources
Bonds – B 34 (4.0) 22 (4.0) 56 (4.0)
Share Capital & Equities – SC&E 26 (3.0) 47 (8.0) 73 (5.0)
Others 19 (2.0) 20 (3.0) 39 (3.0)
Total 864 (60.0) 576 (40.0) 1440 (100.0)
( ) Indicates Parenthesis in Percentage
Source – ICAO Report on Airport Economics – “Highlights in the Economic Development of Airports
and Air Navigational Services”, (ANSConf 2000), Published in June 2002.

SENGUTTUVAN-NR085 29
 In overseeing the source of finance Figure – 9 depicts the different source of airport
financing. Self-finance is representing 30.0 per cent of the total 1440 airports in 92 ICAO contracting
states followed by 25.0 per cent, 17.0 per cent, 11.0 per cent, 9.0 per cent and 3.0 per cent by
Commercial Banks, Government, Development Banks Fund, Bonds and Share equities and other
sources. From this study, we can conclude that most of the airports are in favour of private source of
finance. So, the projected investments in the airport improvement programme worldwide would be in
the hands of private sector management in the years to come.

Figure – 4
Primary Source of Finance in Airport Improvement Programme from ICAO Contracting
Members

Primary Source of Finance in Airport Improvement Programme at 1440 Major and

Medium Airports (Applied & Planned) in 92 States of ICAO Contracting Members

Others
Bonds & Shares
3%
9%
Self Finance
Com m ercial Banks 30%
25%

Governm ent
Developm ent Banks 17%
Foreign Govt. Loans
11%
5%

Region-wise Source of Finance in Airport Improvement Programme

The world wide economic trend is witnessing a new paradigm shift in the investment
pattern of major infrastructure sectors (Telecom, Transport – (Railways, Seaports & Airports), Health,
Tourism and Financial institutions. Civil aviation sector is not an exceptional. The study has also
observed and foreseeing the divulgence in the growing trend of private sector participation in airport
infrastructure industry region wise and proved the private sector involvement would be high as
compared to self- finance and government funding. The data reveals that (Table- 10) private sector
share would claims to be 48.15 per cent, 55.47 per cent, 55.52 per cent, 46.15 per cent, 43.08 per cent
and 61.90 per cent in Africa, Asia-Pacific, Europe, Middle-east, Latin America and Caribbean and
North American regions respectively. North America, Europe and Asia-Pacific are topping in the list
of private sector participation.

SENGUTTUVAN-NR085 30
 Table – 7

Region-wise Source of Finance at Major & Medium Airports of ICAO Contracting Members States
------------------------------------------------------------------------------------------------------------------------
Regions Source of Finance at Major and Medium Airports Applied &
Planned (in Percentage)
Self-Finance Government Funding Private
------------------------------------------------------------------------------------------------------------------------
Africa 29.37 22.49 48.15
Asia-Pacific 28.13 16.41 55.47
Europe 33.13 11.35 55.52
Middle-East 15.38 38.46 46.15
Latin America & Caribbean 28.46 28.46 43.08
North America 23.81 14.29 61.90
------------------------------------------------------------------------------------------------------------------------
Source – ICAO ANSConf Report, 2000, June 2002

Figure – 5

Regio-wise Source of Finance Applied and Planned at 92 Member States of ICAO

100%

90%

80% 46.15 43.08

48.15
55.47 55.52
61.90
Source of Finance in%

70%

60%

50%
28.46
22.49
40% 11.35
16.41 38.46
14.29
30%

20% 33.13
29.37 28.13 28.46
23.81
10% 15.38

0%
AFR ASPR EUR MER LACR NAR
Regions

Self-Finance Government Private

New Airport Ownership Model – Listed Airport Shares values - 1987

Airport Privatization dated back to 1987, when BAA started moving to privatize the
seven airports in UK. They initiated airport privatization through floatation of shares in the stock
exchange. Later on other airports in the European countries followed this model. Today this model is
successful worldwide. There are about 11 airport companies are under the stock exchange. In Asia, a
Malaysia airport (MAB) was the first country to float the share value of Airport Company in the stock
exchange. Later on China Beijing Airport followed the Malaysian model in the Airport Improvement
Programme. The listed airport share value is given in the table below.

SENGUTTUVAN-NR085 31
---------------------------------------------------------------------------------------------------------------------------
Airport Company Share Price (1) Market Cap Passenger EBITA
Local Currency US $ Million (Million) Million
2003

BAA Plc 509 8695 124.7 1507

Beijing 1.65 814 24.2 133
Fraport 19.6 2043 48.6 581
Vienna 31.5 765 11.9 156
Zurich 34.5 129 21.1 203
Copenhagen 460.5 653 18.1 187
Malaysia 1.46 423 32.4 72
AIAL 5.27 931 8.4 106
ASUR 13.88 416 11.2 68
Firenze 15.8 164 1.5 NA
TBI (Plc) 52.0 468 11.2 78
---------------------------------------------------------------------------------------------------------------------------
Source: - UBS Warburg, Jane’s Airport Review, Volume-15, 2003

The performance of airport listed in stock exchange is analyzed on the basis of

business performed (Traffic growth and EBITA (Earnings Before Interest, Tax, Depreciation and
Amortization). All the eleven airport companies have shown significant performance in the financial
performance. BAA Plc has shown a remarkable performance in EBITDA, US $ 1507 million,
followed by Fraport US $ 581 million, Zurich US $ 203 million, Copenhagen US $ 187 million,
Vienna US $ 156 million, Beijing US $ 133 million, AIAL US $ 106 million, TBI US $ 78 million,
Malaysia US $ 72 million, ASUR US $ 68 million respectively during the period of 2003. Apart from
the financial performance, traffic growth was also satisfactory.

Financial Institutions promoting Airport Privatization

The central, local governments and municipalities account over one-half of airport
investment. Although airport performance is evaluated by profits, regulated by government, therefore,
there is every opportunity to earn the revenue required to service debts and pay adequate dividends to
shareholders. Financing agencies have recognized airports are the places for sound investments, with
the pattern of steady growth posing marginal risk.

The World Bank (IBRD), Asian Development Bank (ADB), the European Investment
Bank (EIB), the European Bank for Reconstruction and Development (EBRD) and export credit
agencies such as the Export-Import Bank of the US, Export Development Corporation of Canada and
their European and Japanese counterparts, is actively supporting airport and airspace infrastructure
developments. This support is particularly evident in Russia, the Commonwealth of Independent
States (CIS), the former Yugoslavia, China and Vietnam. Russia estimated cost of US$ 600 million
annually for major reconstruction works and new airports, but the budget allocated only US$ 336
million in state investments. Under this scarce capital, private funds are becoming more crucial for
Russian airport development. Airports are banking on larger long-haul aircraft to keep movements at
similar levels of today. The increased global liberalization leads to a proliferation of feeder and short-
haul services, as it has done in the United States and is beginning to follow in Europe. Greenfield sites
for new airports and low construction costs gave the Far East a temporary advantage.

Major Issues in Privatization of Airports:

SENGUTTUVAN-NR085 32
 Airport privatization programme has involved number of issues during the
privatization processing time. The main issues related to airport privatization are -

ƒ Civil aviation Act Amendment issues

ƒ Airport related Legal Issues
ƒ Labour policy issues
ƒ Airport operational issues
ƒ Airport financial issues
ƒ Setting up of Regulatory issues relating to Economic parameters
& quality performance indicators
ƒ Security issues
ƒ Safety issues
ƒ Environmental issues

Economic Impact - Airport Development through Privatization:

(a) Growth of GDP: Air transport is directly influenced by the global economy. If we see the
GDP growth of developed nations, it is significant; this is due to well connectivity of air
transport services. Therefore, the comparison of the growth in GDP and air transport growths
shows a strong inter-relation. Air transportation makes a significant contribution to growth
due to the regional growth. An airport has three different level of economic impact, viz.,
Direct Impact (Economic surplus of airport services), indirect impact due to off site
expenditures (Food, Restaurants, Lodging etc.) and thirdly induced impacts generated by the
secondary impact of revenues spent within region. These are so called multiplier effect and it
tends to double the regional economic benefit. Airport has higher multiplier effect as
compared to other modes. Based on the study findings of ATAG (2000) the indirect effects
have the same level as the direct turnover and amounts to US $ 390 billion worldwide. The
induced impact amounts to US $ 650 billion, thus every US$ earned in air transport
contributes to a 4.25 times GDP level. A study conducted for UK (Oxford 1999) analyzed the
impact of the aviation industry contributes to the economy was 1.4 % of the GDP, which is £
10.2 billion. The sector produced around two and half times as much as value added per head
as the average for all UK industries. The study made by IATA Aviation Information and
Research Department (2001) indicated a strong economic growth in Asia-Pacific region than
rest of the world due to excessive demand in air traffic growth. The table below would show
the projected GDP growth for Asia-Pacific as compared with Western Europe and North
America.
-------------------------------------------------------------------------------------------------------
Year Western Europe Asia Pacific North America

US $ Billion AAR US $ Billion AAR US $ Billion AAR

------------------------------------------------------------------------------------------------------
1985 5160 - 3659 - 5167 -
1998 6958 2.3% 5755 3.5% 7102 2.5%
2005 8255 2.5% 7208 3.3% 8408 2.4%
2010 9301 2.4% 8840 4.2% 9447 2.4%
-----------------------------------------------------------------------------------------------------
AAR – Annual Average Growth Rate
Source – Data Resources International, IATA, 2001

(b) Employment Generation: Air transport industry generated a turnover of US $ 1400 billion
worldwide. It generates 20-25 million job opportunities on site and off site premises globally.
More than 5.0 million people are engaged directly by the air transport industry throughout the

SENGUTTUVAN-NR085 33
 world (IATA, 2000 & ATAG, 2000). Nearly 1.5 million people in the United States alone in
the air transport sector (ATAG, 2000). In Europe 0.3 million and Asia-Pacific approximately
0.2 million. More important are regional comparisons. In the vicinity of airports the share of
direct employees and GDP is much higher. Several case studies (ATAG, 2000) have analyzed
regional benefits. In Brisbane (Australia), the airport accounts for 6.8 per cent of state GDP
and 5.2 per cent of employment within the state. As a result, 16,400 people earn their living
directly from airport operations and a further 67,200 jobs indirectly depend on airport
operations. In other airports, these shares can go up to 10.0 per cent depending on the size of
the region. The typical economic impacts of airports are depicted in the table below.
--------------------------------------------------------------------------------------------------------
Size of Airport Employment Output (US $ Million)
Direct Total Direct Total
-------------------------------------------------------------------------------------------------------
Large Scale 2000 8000 225 1600
Medium-Scale 1500 6000 75 650
Small-Scale 750 2500 35 130
------------------------------------------------------------------------------------------------------
Estimation based on the relevance of airport (Regional & Functional)
Source – Air Transport Action Group, (ATAG) 2000

(c) Revenue Generation: Air transport industry helps in building up revenue formation through
various sources. If we take airport, for instance, the revenue generation takes place through
Airside and landside. Airside revenue generation in the form of Landing, Parking and Route
Navigational Facilities. Apart from these it also collects revenue from space allocation for
aircraft parking by constructing the hangars. In general, airport revenue generation from
airside is around 50-60% of the total revenue generation. Landside revenue generation varies
approximately from 30-40%. Landside revenues are collected through commercial forms in
the terminal buildings by giving a space to various concessionaires and retail marketing.
Landside revenue depends upon the traffic populations, who enplane and deplane in the
airport. The most important factor for commercial revenue generation is depended on scale of
airport size. The study conducted by Kapur (1995), cities the example of privatized BAA Plc
as an airport operator, which has been especially effective in developing airport commercial
activities, both in its own airports and increasingly as a contracted manager of passenger
terminals and commercial facilities in other countries including Hong Kong, China, Malaysia
and United States. Let us see the average land side revenue per passenger by ownership
structure in the following table:
------------------------------------------------------------------------------------------------
Ownership Structure Average Revenue per passenger (In US $)
------------------------------------------------------------------------------------------------
Government Department 4.88
Public Corporation 7.23
Regional Government 7.64
Public – Private (Joint Venture) 8.64
Private Operators 11.14
World Wide Average 5.22
--------------------------------------------------------------------------------------------------
Source – Kapur Anil (1995), “Airport Infrastructure: The Emerging Role of the
Private Sector”, World Bank Technical Paper # 313

(d) Foreign Exchange Revenue: Aviation Industry business helps the state to earn more foreign
exchange. This is another vital advantage in the economy. Aviation trade and services are

SENGUTTUVAN-NR085 34
 under invisible items in the Balance of Payments. Hence, this would help the economy in
combating BOP position with other country.

(e) International Tourism Promotion: Air Transport industry is playing a vivacious role in
promoting international tourism. To promote tourism in the region a sound infrastructural
development is needed. So, airports are one of the main economic components in the tourism
development. The economic importance of tourism can be narrated briefly. Tourism is
considered as the most remarkable socio-economic phenomena, which created a vital
dimension of global integration. It comprises an extensive range of economic activities and
considered as the largest industry in the world. International tourism is one of the fastest
growing sectors of the global economy. According to the World Tourism Organization (WTO,
2001), foreign exchange earnings from international reached a peak of US $ 555 billion in
2001, which was larger than the export value of petroleum products, motor vehicles,
telecommunications equipment or any other single category of product or service.
International tourism receipts is accounting for more than 8.0 per cent of the worldwide export
value of goods and services. A significant proportion of world tourism recorded a trade
surplus in the developing countries. For instance, between 1980 and 1996, their travel account
surplus increased from US $ 4.6 billion to 65.9 billion. From this evidence, we can derive
tourism is one of the primary and second largest source of foreign exchange earnings, hence
the civil aviation industry is the one industry which can promote international tourism in order
to earn adequate amount of foreign exchange, therefore the state should take drastic step in
promoting airport infrastructure in the region. The table given below elucidates the
international tourist’s arrival and receipts during the year 2000.
-------------------------------------------------------------------------------------------------
Region International Tourist Arrival Foreign Exchange Earnings
(In Million) Mkt Share in %(In US $ Billion) % share
--------------------------------------------------------------------------------------------------
Africa 27.2 3.9 12.21 2.2
Americas 128.4 18.4 159.30 28.7
East Asia & Pacific 109.1 15.7 96.02 17.3
Europe 402.7 57.8 270.00 48.6
Middle-East 23.2 5.3 11.10 2.0
South Asia 6.1 0.9 6.11 1.1
--------------------------------------------------------------------------------------------------
Total 696.7 100.0 554.74 100.0
--------------------------------------------------------------------------------------------------
Source: World Tourism Organization (WTO), 2001

(f) Industrial Development: Aviation industry supports and acts as the fundamental role in
industrial location, especially airport infrastructure plays a massive role in the modern
industrial development. For instance Software industries. Today India is exporting and earning
substantial foreign exchange revenue through this industry. Therefore, it is accessibility factor,
which acts an important role in this function. The location of economic activities is a priori
dependent on the nature of the activity itself and of the location factors it relates to Primary
Economic activities, Secondary Economic activities, Tertiary Economic activities and
Quaternary Economic activities.

(g) International Trade Promotion: Civil Aviation sector, the modern transportation mode helps
the nation to promote trade with other nations. International trade agreement has made through
bilateral and multilateral ways. Since air transport is considered as an international
transportation, therefore, this will widen the trade globally. Today most of the developing and
less developed countries are giving more importance in the development of air transport

SENGUTTUVAN-NR085 35
 sector, since this would pave a way for trade promotion and market their products in the
international market.

(h) Global competitiveness: Infrastructure development is a basic barometer for developing any
economy into developed nations. It also assists the state to compete in the global
competitiveness. Developed economies invests a huge amount on infrastructure development
for the faster pace of economic growth, whereas, developing economies invest just 4.0 – 5.0 of
the total investment on infrastructure. Therefore, the economic activities are unbalanced and
lead to inflationary pressure in the economy. Infrastructure consists of five components viz.
Basic infrastructure (Roads, Ports, Airports, Power & Communication), Technological
Infrastructure, Scientific Infrastructure, Health & Environment and lastly the value system.
Among the five components, basic infrastructure is very immense in the global
competitiveness. Most of the developing economies are facing huge problem in the basic
infrastructure. Today, Airports are playing a central role in the development of regional and
national level. It acts as a Multi-Modal business centre for growth of regional economy.
Investment in this sector is very limited, since the state or government finds difficult to invest,
since airport is a capital-oriented industry, it needs huge investment. So, private sector
participation in this sector would help in bringing the global competitiveness in the state
economy. The study conducted by the World Economic Forum (2002) on rankings of
competitiveness versus infrastructure for some of the developed and developing countries,
which is appended in the tabular below:
--------------------------------------------------------------------------------------------------------
Country Infrastructure Ranking Overall Competitiveness
1998 2002 1998 2002
--------------------------------------------------------------------------------------------------------
United States 1 1 1 1
United Kingdom 22 21 13 16
Germany 15 11 15 15
Japan 17 16 20 30
Singapore 2 7 2 5
India 43 47 38 42
Indonesia 43 47 38 42
Korea 38 28 36 27
Malaysia 24 26 19 26
Philippines 35 44 32 40
Taiwan 20 20 14 24
-------------------------------------------------------------------------------------------------------
Source: World Economic Forum, 2002

By seeing the overall economic impact of air transport, it is clearly understood that
today civil aviation sector is playing a dynamic role in the development of any economy. The
economic impacts, which are mentioned above, are closely inter-related with each segment for the
growth of an economy. Hence, this sector should be strengthened via government funding or through
private sector participation in order to achieve global competitiveness unlike other developed
economies.

7. Performance Analysis of different Airport Ownership and Governance

Today in the free market economy, airport performance act as a most important
element to enrich international business in the country in terms of providing world-class service within
a time frame to satisfy the customer who uses the airport for business or for leisure. Airport
performance enables to know the traffic growth and trend, financial efficiency, market expansion in

SENGUTTUVAN-NR085 36
yielding non-aeronautical revenue, labour and capital productivity and the operational efficiency.
Therefore my study examines the airport performance for the sample of twelve airports with different
ownership pattern and governance model. The major airports are taken for study is – (Vienna, Zurich,
Manchester, Chicago, Los Angeles, Singapore, Vancouver, Bangkok, Mumbai, Geneva, Oslo, Osaka,
Brussels and Amsterdam. These airports serve the major cities of commercial and business centres.
However, the ownership pattern varies from country to country. This has a great impact on airport
degree of independence, which in turn it helps, us to know the performance analysis in overseeing the
managerial ability to determine the performance standards. Comparability of airports in this study is
broadly categorized into four groups – Traffic Proportion, Financial Accounts, Unit Cost Analysis and
Airport service standards.

Airport Performance Efficiency Measure

The use of performance measures in the airport industry is crucially important in

evaluating the economic features of airport and finding out the efficiency in terms of output namely
traffic, services and income. In a perfect competitive market environment, market forces should ensure
that optimal performance could be equated with profitability. However, the conditions under which
airports operate are far from Competitive, Regulatory, Geographical, Economic, Social and Political
constraints hinder direct competition between the airports. At the same time, the extents to which
airports can attract other airport traffic with different price or service level are also very limited. In
other words, the demand for airport is relatively inelastic. Airports are all quasi –monopoly by
extracting high revenues from their customers. In this instance, profit measure alone will not do for
analyzing the efficiency measure. Therefore a system of ratio’s or indicators measuring the inputs and
outputs in both financial and physical terms is essential to measure the performance of airport.

Means of Measuring Airport Performance:

Airport performance is measured to see the airport output and airport revenue among
the 12 airports with different ownership and governance model. The main output of an airport industry
is measured on two important aspects, namely – Airport traffic and Airport revenue. Airport traffic is
the main business for measuring the performance and productivity of any airport in the globe. These
measures should be consolidated in “TRAFFIC UNITS”. Traffic units determine the activities of
Passengers; Freight & Mail handling impose similar requirements on the airport. The other major
items of airport output are “Revenue”. It comprises of income, which is generated through two types
of activities namely, Aeronautical and Non-Aeronautical. Both the revenues are subdivided into
various components in order to identify the various sources of revenue earning through airport
industry business. Now let us see the traffic proportion performance of study airports below

Airport International in % Domestic in % Total

(Million) (Million) (Million)

Vienna 11.06 95.0 0.58 5.0 11.64

Zurich 21.07 94.0 1.35 6.0 22.42
Manchester 14.97 82.0 3.29 18.0 18.26
Chicago 13.04 15.0 73.86 85.0 86.90
Los Angeles 20.25 26.0 57.65 74.0 77.90
Singapore 35.57 100.0 - - 35.57
Vancouver 7.38 47.0 8.33 53.0 15.71
Bangkok 21.69 70.0 9.29 30.0 30.98
Mumbai 5.03 44.0 6.53 56.0 11.56
Geneva 5.92 85.0 1.04 15.0 6.96
Oslo 5.64 47.0 6.37 53.0 12.01

SENGUTTUVAN-NR085 37
Osaka 14.75 57.0 11.13 43.0 25.89
Amsterdam 45.60 99.0 0.46 01.0 46.06
Brussels 24.36 100.0 - - 24.36

Mean 17.56 69.0 12.85 31.0 30.44

The above table reveals the traffic proportion of different ownership and airport
governance during the year 1999-00, of which private ownership airports show above the mean level
in international passengers traffic (<69.0%). Whereas, the other airports, which are under government
department, Authority, Public corporation and Government majority, revealed the international
passenger traffic proportion is below the mean level (>69.0%). International passenger traffic has a
close relationship with airport revenue.

Financial Performance of Different Ownership of Airport

Revenue Performance (in Million US $)

Airport Aeronautical Non-Aeronautical Other Total

Revenue Revenue Revenue
(Million US $) (Million US $) (Million US $)

Vienna (Pvt) 265.74 38.59 30.92 335.25

Zurich (Pvt) 156.92 56.88 31.56 248.36
Manchester (Pvt) 227.14 154.42 36.86 418.42
Chicago (Govt) 250.34 147.77 70.52 468.63
Los Angeles (Govt) 136.44 285.97 26.43 448.84
Singapore (Govt) 186.79 237.18 174.33 598.30
Vancouver (Auth) 85.12 48.82 18.27 152.81
Bangkok (Auth) 102.50 70.75 32.71 205.96
Mumbai (Auth) 100.0 32.00 5.00 137.00
Geneva (PC) 52.99 28.13 29.31 110.43
Oslo (PC) 130.08 76.44 20.51 227.03
Osaka (PC) 342.84 335.62 222.38 900.84
Brussels (GM) 145.89 71.34 41.42 258.65
Amsterdam (GM) 273.21 207.87 112.41 593.49

Mean Value 168.05 128.70 61.69 358.44

From the above table we can reveal that the mean value revenue performance of
authority ownership is very low as compared to other airports ownership. The ownership under private
and Government controlled airports are performing above the mean value. This refers that private and
government runned airports are performing well.

Percentage Share of Different Airport Ownership

Ownership Aeronautical Non-Aeronautical Other Revenue Total

Private 66.0 24.0 10.0 100.0

Government 28.0 39.0 33.0 100.0
Authority 58.0 35.0 07.0 100.0
Public Corp 48.0 32.0 20.0 100.0
Govt Majority 51.0 31.0 18.0 100.0

SENGUTTUVAN-NR085 38
Mean Value 46.0 36.0 18.0 100.0

The share of airside revenue is very high (66.0%) in private airport as compared to
other ownership airports, which is above the mean value of 46.0%. Government owned airports are
performing very well in landside revenue, which is above 36.0%. This reveals that government owned
airports are performing efficient in generating airport revenue.

Study Airports Unit Revenue (in US $)

Airports Aero Rev per Pax Non-Aero per Pax Total Rev per Pax

Vienna 22.83 3.32 28.80

Zurich 7.00 2.54 10.95
Manchester 12.44 8.46 22.91

Chicago 2.88 1.70 12.70

Los Angeles 1.75 3.67 5.76
Singapore 5.25 6.67 16.82

Vancouver 5.42 3.11 9.73

Bangkok 3.31 2.28 6.65
Mumbai 8.65 2.77 11.85

Geneva 7.61 4.04 15.87

Oslo 10.83 6.36 18.90
Osaka 13.24 12.96 34.79

Brussels 5.99 2.93 10.62

Amsterdam 5.93 4.51 12.89

The above table shows unit revenue earned at various airports under different
ownership. Vienna, Osaka airports generate maximum unit revenue from different airport sources.
This shows the financial efficiency in creating unit revenue. So the airports under private and public
corporation airports have more efficiency in generating various sources of airport revenue.

Unit Cost of Revenue under different ownership (in US $)

Ownership Aeronautical Non-Aeronautical Total*

Private 14.09 4.77 20.89

Government 3.29 4.01 11.76
Authority 2.91 1.80 5.46
Public Corporation 10.56 7.79 23.19
Government Majority 4.24 3.04 8.95

* Includes (Aero+Non-Aero+Other Revenue)

The above table reveals that the average revenue earned by private airport is US $
20.89, whereas, the airport under Public corporation was US $ 23.19. This shows that public
corporations airports and private airports earn the maximum unit revenue in the study airports. The

SENGUTTUVAN-NR085 39
least average revenue earned was (US $ 5.46) at authority owned airports. The average revenue
generated per passenger from aeronautical and non-aeronautical sources is US $ 14.09, US $ 4.77
from Private airports. This shows a greater financial efficiency in generating the airport revenue.

Expenditure Pattern of different Airport ownership (in Million US $)

Airports Operating & Maint. Cost Non-Capital Cost Capital Cost Total

Vienna 173.71 50.69 45.58 270.98

Zurich 175.42 - 37.57 212.99
Manchester 230.39 - 82.91 313.30
Chicago 340.49 51.32 308.52 700.33
Los Angeles 217.44 4.00 78.77 299.71
Singapore 155.95 - 135.19 291.14
Vancouver 42.10 37.71 29.45 109.26
Bangkok 29.97 33.00 25.91 99.18
Mumbai 55.0 - 30.00 85.00
Geneva 69.69 2.88 25.15 97.72
Oslo 103.96 - 112.13 216.09
Osaka 352.43 100.10 629.08 1082.51
Brussels 155.93 - 84.63 240.56
Amsterdam 305.05 - 130.68 435.73

The above table shows the airport expenditure under different ownership. Private
airports are showing least cost in running the airport business, whereas, the other airports under
different ownership shows higher than the private airports. Therefore, cost efficiency is maintained
under private airport ownership.

Trading Profit Under different Ownership (in Million US $)

Airport Revenue Expenditure Trading Profit

Vienna 335 271 64

Zurich 248 213 35
Manchester 418 313 105
Chicago 469 700 -231
Los Angeles 449 300 149
Singapore 598 291 307
Vancouver 153 109 44
Bangkok 205 99 106
Manchester 137 85 52
Geneva 110 98 12
Oslo 227 216 11
Osaka 900 1082 182
Brussels 259 241 18
Amsterdam 593 436 157

The above table shows a trading profit of airports under different ownership. Private
airports are performing higher than other airport ownership. This shows that evidence that private
airport operators are having higher profit generating efficiency as compared to other airports
ownership.

SENGUTTUVAN-NR085 40
 Measuring Standard of Airport Service

Besides the Input –Output measure, the other important measure should also be taken
into consideration to oversee the performance of airport services provided to the airport customers.
Airport service is an immense to evaluate the airport product from the customer in terms of quality
produced through the input-output measure. Attention is needed to monitor the service levels to ensure
better efficiency improvement in providing the airport services. For instance, Airport Management sets
policy on airport operating capacity that is capacity of holding passenger in the terminal. This varies
from airport to airport. The determination of acceptable waiting time at check-in facilities and the
amount of waiting room space allocated to each passenger. Moreover, it is also important to know the
passenger satisfaction level achieved by an airport by means of rating the airport services. This can be
obtained through - Comment cards made available at prominent locations at the airport or Conducting
Customer Satisfaction Survey at the airport every quarterly or Half-yearly for evaluating the airport
facilities and services rendered by the airport authorities. The Measurement of Runway and Bay
availability, Serviceability of mechanical equipment’s like – Conveyor Belt, Elevator, and Escalator
etc. are to be surveyed every day for efficient operation.

Performance of Quality

Airport Ownership Quality Performance Rating

Government 3.5 Good

Private 3.6 Very Good
Authority 3.5 Good
Public Corporation 3.6 Very Good
Government Majority 3.6 Very Good

World Average 40.0 Excellent

Based on the airport performance quality indicators most of the airports are providing good
services.

Conclusion:

The operating model of airport operations are slowly changing the airport
industry and bringing the role of productivity and efficiency like other industries, which are
seeking the goal of profit maximization with planned input. This activated the growth of new
market in the airport services including infrastructure development, airport management
systems and partial ownership or management contracts in the areas of ground handling and
retailing. Airport privatization is concentrated mainly in two regions, namely- Latin America
and Europe. The main aim of privatization in airports would create a way customer approach
with mission of providing airport services to customers. Apart from this it will enable the non-
viable airport to viable through proper management planning. Today, airport privatization is
rooting everywhere in Asia and Pacific, Central Asia or Common Independent States (CIS),
South Africa and Middle East regions. Over the next ten years, 120 airports worldwide are
expecting to be partially privatized as per the recent trend of the state economic condition.

SENGUTTUVAN-NR085 41
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