"It is one of the finest problems of legislation—what the state ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual discretion."
—Edmund Burke, Thoughts on Scarcity, 1795
Anyone observing the growth of government in the United States since 1795 might be tempted to judge that, over the years, Americans have resolved Burke's "finest problem" by opting for greater direction of private actions by the "public wisdom" and leaving less for individual discretion. Times change, however, and so does public opinion. The recent outpour of complaints about the size of government and the extent of its interference in private decisions suggests that Burke's problem has once again become a live issue.
Among the many good reasons why the role of government should be reexamined is this: when government substitutes the political process for individual discretion, it of necessity also substitutes political criteria for economic criteria. That is, it relies on head counts and special group interests, rather than efficiency, in determining how to conduct business. The results are often neither politically nor economically satisfactory. A good example of an unsatisfactory outcome is airport service in the Washington, D.C., area. There, the Department of Transportation, through the Federal Aviation Administration (FAA), actually owns and operates two of the area's three commercial airports.
Is the federal government's operation of these airports based on sound economic criteria? That is, are there conditions in the Washington area such that it makes any sense at all that the government administers these airports? And, further, what would happen if the airports were privately owned—if the federal government auctioned them off to the highest bidders and let the private owners do with them as they would? A comparison of the existing arrangement with this latter, private scenario offers the answers.
According to classical economic theory, several general conditions call for government intervention in the provision of any services. Legislators tend to state them as: (1) lack of competition, so that a monopolist can restrict supply and maintain an artificially high price, (2) lack of information about a service, so that consumers are unable to make rational choices among available alternatives, and (3) the existence of benefits that cannot be captured by a private entrepreneur (so he underinvests) or costs not borne by the entrepreneur (so he overproduces). In the case of airports, particularly in the Washington, D.C., area, only the last of these holds.
Consider the possibility of monopoly. There are three major commercial airports serving the market: Washington National and Dulles International, both run by the FAA, and Baltimore-Washington International, run by the state of Maryland. They are not equal competitors. National has relatively short runways but is only 10 to 15 minutes from downtown Washington. Dulles and Baltimore, with longer runways, are more like an hour away. Travelers prefer National to both of the others if for no other reason than its convenience—it saves time—but ground travel also is less expensive. Taxi fare from National to downtown Washington is only about $5, while from Dulles a taxi is $35, and even the limousine, with all its delays and stops, costs more than $7.
None of the three airports, however, is able to unilaterally restrict air access to the D.C. area and thereby maintain an artificially high charge to the airlines operating in the area. (And the fees that airlines pay airports to use their facilities are, of course, ultimately paid by the airlines' customers.) In fact, with all three airports, there is excess capacity in the area, and airlines could maintain access even if one were to close.
As for a lack of consumer information, there is certainly no limit on information about the available services. Airlines maintain a national network of bookings—both they and consumers have instant access to all that anyone could ever want to know about available services.
There are, however, uncharged costs of airport operations—for example, noise, air pollution, and the danger of aircraft falling in neighboring communities—but these are local, community costs. Proper handling of these costs—through the courts, for instance—requires the federal government neither to administer the airports nor even to intervene in their administration.
The federal government is constituted to take care of problems that concern all of society, such as national security, protection of civil liberties, and maintenance of free commerce. But no such problem resides in, or is solved by, provision of a particular amenity—airport facilities—to a particular community—Washington, D.C.
Why, then, does the federal government run two commercial airports? Simple custom has a lot to do with it, for no major commercial airport in the United States is privately owned and operated. This situation derives in part from the fact that most airports—excluding some larger, big-city ones—generally seem not to be profitable enough to attract sophisticated investors. By itself, that is not an overwhelming argument that airports ought to be government operated. If people in a community strongly believe they should have an airport available to them, they might voluntarily cooperate to build one and contract with a private firm to manage it (see sidebar, page 36).
Governments, however, seem to work under the principle that once any government, anywhere, has done something, it is proper for other governments to do the same. Moreover, once any government starts to do something, it takes the equivalent of an earthquake to stop it.
In the case of airport service in the Washington, D.C., area, history has also played a part. The federal government used to be the district's local government. It acted like a county or municipal administrator, and following custom, it provided the same kinds of services. The federal government built National Air port during the Great Depression, when spending on public works was probably more of an objective than the provision of airport services. The current National replaced an earlier airport—Washington Hoover—which in turn had replaced two competing, side-by-side airports (Washington National and Hoover), which had begun operations in 1926 where the Pentagon now is.
Baltimore-Washington International, which opened as Friendship Airport in 1950, was built by the city of Baltimore to replace another airport—Harbor Field—which the city had built nine years earlier. (The timing suggests that the city's earlier foresight had been slightly defective.) The state of Maryland "bought" the airport from the city in 1972. It was a typical government bailout of a losing operation, although in this case, the state was bailing out the city instead of a private entrepreneur. Overoptimistic planning by the FAA made the bail-out necessary. Predicting massive growth in airline operations, the FAA had concluded that four airports were needed in the area. The agency said that "even if developed to its ultimate capacity," Baltimore-Washington "would be incapable of handling its share of the traffic after 1965."
To handle the expected crush of passengers, the FAA then built Dulles in the early 1960s, at a cost of $108 million (in 1965 dollars). The complex comprises modern airstrips and a beautiful and cleverly designed terminal with mobile lounges to take passengers to the planes. A 17-mile, four-lane, divided highway—built expressly and exclusively for access to and from the airport—connects Dulles with the Beltway around the Washington metropolitan area.
As things turned out, however, the FAA's foresight about both future traffic and the ultimate capacity of Baltimore's airport was wrong. Not only was a fourth airport not needed, but the demand for both Dulles and Baltimore failed to grow as anticipated. In fact, Baltimore currently has enough capacity to handle nearly twice the number of passengers that now flow through both it and Dulles combined. Simply put, Dulles is a white elephant, a continuing embarrassment to the FAA, and a thorn in the side of the secretary of transportation, whose office is ultimately responsible for the airport's operation.
So here we are—custom and history have conspired to give us three airports in an area where two would do. But is that any reason to complain? The answer is an unqualified yes, for unfortunate results almost naturally flow from government operation. And the case of the federal government's operation of Dulles and National airports provides a clear object lesson of this fact.
When government runs something, it tries not to make a profit or loss along the way. That's not as innocuous as it sounds. By making the revenues from a service cover the costs of providing the service, the price charged to users of the service is simply an average cost (total costs divided by the number of users). Thus, fees in a busy place—where demand is high—will be low, and where demand is low, fees will be high. But customers for any service respond to prices: high prices choke off sales (leaving the service underused) and low prices encourage them (creating overuse of the service). Average-cost pricing has caused these problems at Dulles and National.
Remember that National is preferred by customers, because it is relatively close to downtown by taxi and, for the last few years, by subway. Responding to customer preferences, the airlines schedule as many flights as they can to that popular terminal. The heavier use, then, reduces the average cost (that is, the airport's charge to the airlines that use the facility). Thus, the interests of airlines—more flights scheduled at National mean a lower price to each user of the terminal—reinforce those of passengers in choosing National. And since 1966, when jets were first allowed to use the facility, the airlines have tried to schedule more flights there than the facility can handle. Indeed, for a long time, the FAA has limited National's operations—takeoffs and landings—to 60 per hour and has urged airlines to shift flights from National to Dulles. At the same time, however, landing fees and mobile-lounge charges at Dulles were higher than the fees at National, making the shift of use from National to Dulles even more unlikely.
In 1980, the FAA tried to right the imbalance by temporarily eliminating landing fees and charges for the mobile lounges at Dulles. And, since 1982, the agency treats the two terminals as a single costing unit: the total cost of operating both airports is averaged over the total number of users at both to determine the user's fee. This decreased the fees at Dulles and raised the fees at National. And since the fees are now the same at both airports, airlines no longer have any financial advantage in using National. But the arrangement means that passengers using National now subsidize those using Dulles. Cross-subsidization among passengers is a familiar story in government-run transportation. In this case, a $10-million drop in revenues at Dulles works out to about a $4-per-passenger subsidy there.
But cross-subsidization is not all of the problem. Far worse is that some way has to be found to choose who gets to use the airport among all those who want to. The fact that some potential users must be excluded is also a familiar problem in government. It signals that something valuable—such as the use of a conveniently located airport—is underpriced. When that happens, the typical bureaucratic response is to ration the valuable resource in the name of "fairness," using some rule such as "first-come, first-served."
Since 1966, the FAA has tried several rationing variants at National. Initially, access was limited to airliners flying nonstop no more than 600 miles into or out of the airport. But that rule excluded flights to and from Atlanta and Chicago. Political pressure prevailed, and the limit was soon raised to 650 miles to include those cities. In 1981, it was raised to 1,000 miles, still in effect today.
Distance rationing has been far from successful, because it has no real basis either in consumer preferences or in the economics of air transportation. The proof is in the absurd spectacle of planes taking off from National, landing at Dulles—some 25 miles away— taking off again for destinations more than 1,000 miles away, just to beat the system.
Moreover, nonairline users—such as operators of Piper Cubs, corporate jets, and air taxis—claim that, in "fairness," they deserve access to National as much as do commercial airliners. In a political system, the claims of influential, organized groups are treated as legitimate. The FAA has responded by reserving 23 of the 60-per-hour landing and takeoff slots for such operators. If it is absurd for an airliner to hop 25 miles from National to Dulles in order to fly more than 1,000 miles nonstop out of the Washington, D.C., area, how else can one characterize the spectacle of a 150-passenger airliner having to land at Dulles to make way for a Piper Cub to land at National?
Other absurdities, too, spring from obsession with "fairness." For example, when the FAA announced a new "Washington Airports Policy" in November 1981, its stated objectives included encouraging greater use of Dulles, "which has been underutilized," and achieving "a more equitable balance of service between the two Federally owned and operated airports serving the greater Washington area." By saying that Dulles is "underutilized," the FAA means that some thoughtless travelers are not using the facility as much as the FAA had hoped and planned for. And in seeking an "equitable balance," the FAA is trying to force airlines and passengers to conform to its hopes and plans. Our government wants travelers to be fair to the airports—that is, to the FAA.
Fairness comes up in other ways, too. When the airlines, under the pressure of restrictions associated with the 1981 air traffic controllers' strike, took to selling landing slots among themselves as a way of rearranging their routes, the FAA formally forbade such sales. The airlines were only allowed to trade the slots so that the relative wealth of airlines wouldn't determine the allocation of slots. And when Braniff suspended its flights and left some slots unused, the FAA reallocated them by lottery. After all, a lottery is "fair"—that is, no one could accuse the FAA of favoritism in allocating routes and landing rights.
No private operator of National Airport would act as the FAA has. Rather than charging the average cost and imposing rules to arbitrarily ration use of the facility, a private operator would charge a market price—all that the traffic would bear. He wouldn't waste a single moment worrying about the "fairness" of that price, or "equitable balance" of use of airports, or whether some otherwise "worthy" users, like air taxis or corporate planes, were being excluded.
A private operator would try to maximize profits. In doing so, he would unintentionally ration National in the most efficient fashion: only those travelers to whom quick access is valuable would use it, while those who cared more for the dollars than for time would use one of the more distant airports. A private operator would treat National as a business, not as a political football.
And he would make a fortune at it, too. National is so much more valuable an airport than the others that most passengers would be willing to pay a premium to use it. Indeed, a 1981 study by the Civil Aeronautics Board estimated that even at $16.50 extra per passenger, few passengers would choose an outlying airport instead of National. At present, more than 15 million passengers use it per year. Even using a figure more conservative than the CAB estimate—say $15 extra per passenger—that works out to a cool $225 million-plus in profit. (Remember, National's revenues now only cover costs, including some of Dulles's costs. Anything in addition is gravy.) And that says nothing about the 23 available slots per hour now being used by Piper Cubs and other nonairline users at charges as low as $4 per landing. If these slots became available for commercial airliners, National's profit could be even 50 percent higher.
Another way of looking at those numbers puts things in better focus. The FAA's failure to collect the proper rent at National means that the taxpayers—who "own" the airport—are giving $225 million per year to the commercial air travelers who use the airport plus an additional multimillion-dollar bonanza to the nonairline users. I call that a gift, just as the Internal Revenue Service would call it a gift if a corporation were to allow a special group—say high government officials—to use a hunting lodge rent-free.
Rent may be a four-letter word, but it serves two valuable functions in resource allocation. First, it forces people to consider competing uses for a scarce resource. National sits on 680 acres of valuable land fronting the Potomac River. Comparable land in the area sells for about $40 per square foot, so National's site would be worth about $1.2 billion. Property that valuable should be getting a return of over $200 million per year (assuming an interest rate of 17 percent). National's projected profitability of $225 million or more suggests that operating an airport may well be an efficient use of the land. If so, however, it is certainly not because anyone planned it that way—governments neither impute rent for their property nor consider alternative uses.
Second, charging rent provides a standard for determining if capital improvements are warranted. And if they are, it provides funds to pay for it. National is short on parking, access roads, and terminal facilities. The CAB suggests, too, that National could accommodate as many as 86 planes per hour—rather than the present 60—by installing more-modern equipment, such as area navigation systems and microwave landing systems. Whether or not to expand, however, should be determined by the relation of the costs and revenues expansion would generate. But National's revenues now go to the Treasury and are not available to finance expansion. The FAA must go through a political appropriations process to make improvements, competing with other pork-barrel projects for federal dollars. The "important" criteria of such proceedings are regional "equity" in funds distribution, the level of unemployment in the area, the size of the budget deficit, and so on. It goes without saying that none of those issues should affect a business decision.
Perhaps the most important advantage of selling off National and Dulles airports is that it would remove a major source of irritation for a lot of people. For example, if the FAA sold Dulles, the new owner might well close it down as an airport. That would make the operators of Baltimore-Washington happy. From the very beginning, they felt that Dulles was stealing their passengers and making life harder. The idea of closing Dulles may sound extreme, particularly to FAA bureaucrats. But the place is a white elephant—no private entrepreneur would maintain the amount of excess airport capacity that Dulles creates in the area. And it isn't clear why the government should do any different. Dulles's entire passenger load could be shifted to Baltimore without causing more than a ripple there.
In addition, Dulles Airport Road—that wholly dedicated, four-lane, and virtually empty divided highway—could be opened to local traffic, easing congestion in the surrounding area. The road is arranged so that cars getting on it going to the airport cannot get off before the airport. Vehicles heading toward D.C., however, can get off the road before reaching town but can only get on the road at the airport.
Traffic in the Washington area is so aggravating that some commuters get on Dulles Airport Road in the suburbs, drive all the way to the airport, turn around, and drive back to Washington in order to avoid less-good roads. It's as absurd as those planes taking off from National and hopping to Dulles before flying nonstop more than 1,000 miles. Of course, if the road were sold to a private owner, it could be opened as a toll road (probably the only source of profit in the whole Dulles complex).
Selling off National and Dulles might make the secretary of transportation happy, too. When former Transportation Secretary Drew Lewis was asked what were the most difficult problems he faced, he picked D.C.'s airport problem as the greatest single consumer of his time. The secretary of transportation is the focus of all the conflicting interests in the facilities: Local residents complain about the noise and the wasted road. Airlines complain about the allocation of space and time and about the fees charged. Congressmen complain about the administration—personnel policies, behavior of the guards, and so forth. And almost everyone complains about the reservation of parking spaces for high-ranking government officials.
Most of the present complaints about the airports would simply evaporate if the airports were privately operated. The noise complainers, since they wouldn't have to fight with the federal government, would actually have a chance to get their case heard in court. Area residents might even stop Complaining altogether if the community were to collect taxes on the land—which the federal government does not pay—and use the revenues to reduce the real-estate taxes of those who now suffer from the noise.
The airlines would almost certainly stop fighting about the allocation of landing rights, fees, and ground facilities. Since politics would no longer have anything to do with those issues, the airlines would treat them as business decisions.
Congressmen might still complain, but even that is questionable. If National were not a federal establishment, congressmen might find themselves happily relieved of an unwanted burden. (What is almost certain is that no private operator would ignore them. While reserved parking for congressmen at National would probably remain, it would no longer be the kind of public affront that it is now. Every consideration congressmen now get from the airport-operating bureaucracy is seen as an abuse of power.)
The case against government operation of Dulles and National is open and shut. And yet, for 16 years, since National was first rationed because of overcrowding, there have been essentially no changes in policy. I quote from a letter I received last year from the Office of Management and Budget (OMB) when I suggested that more-rational landing fees at FAA-operated airports would both improve resource allocation and raise revenue:
As you are aware, determination of landing fees is closely related to the issue of allocation of landing slots.
Alternative methods of allocating slots have been the subject of much study at the Department of Transportation, culminating in the publication of a Notice of Proposed Rulemaking (NPRM) in the latter part of 1980. One of the alternatives set forth on the NPRM, using an auction-type process to allocate slots, is consistent with your suggestion that landing fees reflect the value of services provided.…The appropriate mechanism of allocating slots and establishing landing fees is of interest to this Administration. Your thoughts will be helpful as the issue is given further consideration. Thank you for taking the time to convey them to us.
I have received similar responses from the OMB and the FAA on the many occasions since 1966 when, as an OMB staff economist, I first got involved with the issue. It is the standard "don't bother me with your 'impractical' ideas" letter you get when you send crank letters to important government officials. They don't want to think about correcting errors, even gross errors in policy, just to make their operations more efficient.
This last little tale is not intended as a complaint about my having been mistreated. The moral, and the moral of what I have written here as a whole, is that government is inherently handicapped when it comes to running a business. Even if it adopted some of the practices of a profit-oriented business, it would still be bound by bureaucratic rules and political incentives. And we could count on it to find new ways to be inefficient.
To run an operation efficiently, as a private operator would run it, requires a private operator to do the job. Trying to get the government to seek efficiency by imitating a private operator would be like putting artificial legs on a legless man and then asking him to run the 100-meter dash in the Olympics. It would be better than asking him to run the race with no legs at all, but don't expect him to come in anything but last.
Paul Feldman is director of the Public Research Institute of the Navy Department's Center for Naval Analyses. This article is based on a paper delivered to the Transportation Research Board in January and does not necessarily represent the opinion of the Department of the Navy.
Taking Off Under Contract
How did a New York municipal airport, over a five-year period, go from chalking up quarter-million-dollar annual deficits to turning yearly profits of more than $1 million? By having its operation contracted to a private firm. Pan American World Services, the contract operator of Westchester County Airport, performed this feat by instituting a number of changes when it assumed control of the facility in 1977.
For example, Pan American renegotiated leases with Westchester's fixed-base operators—sellers and servicers of general-aviation aircraft—to increase revenue. The contract firm also instituted charges for car parking and expanded the airport's landing and handling fees.
Moreover, in an entrepreneurial coup, Pan American managed to attract private investment to upgrade the Westchester airport. One corporation invested $4 million in constructing 30,000 square feet of additional hangar space. Another company, Seagram's, plans to construct a $25-million office-building/hangar complex next year. And several major hotel firms have shown interest in building a hotel on the 800-acre site.
In short, by revamping the major revenue sources of any airport—landing fees, rent on terminal and hangar space, and parking and concession fees—and through creative real-estate management, Pan American was able to work its fiscal magic on the money-losing Westchester facility.
Unlike Westchester, however, few major airports are run as profit-making businesses. Much of the reason for this is that all 400 or so major US airports—those with scheduled commercial airline service—are owned and operated by governments or governmental agencies. And there is little incentive for these operators to make revenues exceed costs: operating deficits are subsidized through a variety of governmental funds, and most capital costs—for new construction and improvements—are funded by the federal government.
While the 150 or so largest and busiest airports in the United States do make revenues cover operating costs, the other major airports typically operate at a deficit. And many airport operators—employees of government agencies—insist that most airports must be subsidized. But the example of Westchester County Airport, under the management of a profit-making firm, brings that bureaucratic assumption into question.
And the Westchester airport is not a unique story. Pan American itself manages several other airports, including one in Teterboro, New Jersey. Under its previous manager—New Jersey's port authority—Teterboro had suffered chronic half-million-dollar annual losses. Now, under Pan American's management, Teterboro makes money.
Among Pan American's many revenue-enhancing changes at Teterboro was, for instance, the computerization of landing-fee collection. Rather than send a driver out to each aircraft landing at the airport to collect the fee, a stationary observer simply enters the aircraft's identification into a computer for billing later. Peter Soderquist, Pan American's manager of marketing and sales, says that bad debts on this system run at only half a percent of billings. Computerization eliminated the old system's six employees and two cars, thus bringing down operating costs. Indeed, in taking over Teterboro, Pan American was able to reduce the airport's staff by half.
The management of two airports owned by New York state—Stewart (near Newburgh) and Republic (in Farmingdale, Long Island)—were contracted out earlier this year to Lockheed Air Terminal, a subsidiary of the aircraft manufacturer. Under the management of the Metropolitan Transit Authority—under whose operation New York City's subways are crumbling and losing money—both facilities suffered rising deficits. Contract management, it is hoped, will reverse that situation. Indeed, Lockheed's contracts for Stewart and Republic are modeled after Pan American's Westchester contract.
Lockheed stands out in the chronicles of American airports: for 40 years the firm not only operated but owned an airport in Burbank, California. Major airlines served the facility, which handled a flow of 2 million passengers a year. But because of discriminatory government policies—not least of which was the extensive subsidization of publicly owned airports—Lockheed's profits had shrunk to unacceptable levels by the late 1970s. So in 1978, the firm sold its Burbank airport to a group of municipalities. Now under contract, Lockheed still profitably operates the airport for these municipalities.
Among the few other US municipal airports under contract management are two in Texas—in Addison (near Dallas) and in Galveston—and one in Morristown, New Jersey. But contract management of airports is not restricted to the United States alone.
In the United Kingdom, for example, International Aeradio Ltd. is under contract to provide a number of technical and support services at Liverpool Airport—and saves the airport money doing it. IAL holds a contract to provide communications services at the UK's Bournemouth-Hurn Airport, as well. The same firm manages a number of government-owned airports worldwide, including facilities in Malaysia, Gambia, Zimbabwe, and the Seychelles.