Airport Privatization - Pro and Contra - Term Paper Example

The Privatization of Airports Introduction Airport management should ensure that the airport runs efficiently on daily basis. Ensuring that the customers’ needs are met to their expectations requires the airport management to adopt strategic management plans that are efficient and effective. While the management is looking forward to ensure that its customers are satisfied, there are many challenges that it may come across. The most common challenges for most airport managements are lack of sufficient capital to install the required facilities in the airports, incompetence on the part of the staff, misappropriation of funds and inefficient organizational cultures. Currently, many government-owned airports across the world are looking into privatizing in order to enhance their efficiency. Privatization is a strategic plan that seeks to improve the management of an organization in order to have better control over the real time operations, efficient planning, upgrading the system integration and building a flexible management. This paper will address the privatization of airports, focusing on the reasons for airport privatization and the issues surrounding the privatization processes for airport managements. Reasons for airport privatization Most governments opt to privatize their airports due to lack of infrastructure development funds. The state of airports in the world demands constant investment in infrastructure development on the part of the management. Governments are normally on tight budgets that may not allow the most effective infrastructure development on the airports since it is too costly. Installation of the most recent technology in airports is very expensive and governments may have other pressing issues to cater for whose urgency outweighs the need to improve the quality of travelling. The purchase of new aircrafts, construction and maintenance of runaways is very expensive and it has led many government airports being left behind in the standard ratings (Frost & Sullivan, 2006). Due to this reason, governments privatize airports to hand them over to investors who have the capital to run the airports; thus improving the airports’ competitiveness in the international level. One of the reasons for privatization of airports is to increase the profitability of the business. Airports generate a lot of revenue for the government and the huge profit may be increased through privatization since it attracts huge investors. The interested investors increase the total amount of capital available for planning purposes which may be allocated to several business projects aimed at increasing profits. Investors wishing to expand their business empires are always ready to invest in any business that promises huge returns. Privatizing a profitable airport multiplies its profit based on the interests since the management begins to operate under the interests of its new stakeholders (Friedman & Miles, 2002). Foreign investors may be interested in injecting their funds into a country through their airports. Travelling is one of the most viable investment projects in the world since people will always want to travel and to transport their goods. Foreign investors are particularly interested in airports in foreign countries in order to raise the competition bar a notch higher in terms of travel costs and the quality of services. An airport looking to expand its size and services may opt for privatization through foreign investors who will fund the expansion process. Privatization opens doors for borrowings, which are important part of business expansion. Well capitalized foreign firms may invest their money into turning an airport into a world class standard airport for their own monetary benefits and for the airport country’s benefits (Frost & Sullivan, 2006). Politics may also be a reason for privatization of airports. In most countries, any step that the government takes towards an investment project is faced with oppositions and propaganda from the political scene. This is a great challenge that faces government businesses since it slows down the planning process and the allocation of funds. Most airports are underdeveloped due to politicizing of their funds allocation. A corrupt government may also lead to corruption infiltrating into the airport management leading to misappropriation of funds and the manipulation of the management by the powerful politicians. Privatization eliminates this challenge and it helps in the improving of the planning process (Frost & Sullivan, 2006). Airports privatization may also be a strategic management move to increase the revenue as they attempt to meet the local and international demands. The quality of the services offered by airports is directly proportional to the amount of business it attracts. Countries which have privatized their airports have recorded an increase in tourism in the nations, both locally and internationally. According to the stakeholder’s theory, the management of any organization should place the requirements of the major stakeholders first in every decision it makes (Friedman & Miles, 2002). Privatizing airports opens the door for new stakeholders, forcing the management to develop a paradigm shift that is aimed at improving the state of the management and subsequently leading to the improvement of services and profitability. Types of Privatization Privatization of airports is for the sole purpose of increasing the profit margins and the quality of the services offered simultaneously. This is done through the shifting of the current management to another management that promises to change the airports’ efficiency in terms of both the profitability and efficiency. There are several forms of airport privatization. The most common privatization methods for airports are share issue and asset sale privatization (Megginson, 2000). The privatization method selected by government depends on its economic and political interests. A government may opt for share issue privatization since it gives the nation’s citizens a chance to own part of the airport through a public offers in the stock market. The government may still keep part of the airport’s shares to raise revenue in the future as the airport increases its profit margin. Share issue Privatization (SIP) Share issue privatization occurs when an airport wants to expand in terms of infrastructure development and quality improvement through installing the latest technology. If the government owned airport management is not able to raise the capital required for the whole process in its budget, it may opt for a share issue. The shares are sold in the stock market and the public investors are free to buy the shares. The company may impose limits on the minimum and maximum shares that an individual share buyer can acquire. The share capital collected is then injected into the scheduled expansion program of the airport in question. The management should target the most developed capital markets in the share issue process to find more share buyers. Following this type of privatization, the airport can raise hefty amounts of share capital to finance the core business processes that subsequently lead to profit increase. Many airports have used this form of privatization since it leaves the management intact (Megginson, 2000). Asset sale privatization Asset sale privatization entails selling the entire airport assets or part of it to big investors. The sale could be local or foreign. It could also be done as an auction whereby the local and foreign companies are invited to place their bids on the assets. The highest bidder is taken as the buyer and the assets in question are transferred to their name. This form of airport privatization fetches a lot of income for the government since the airport assets are sold at the highest prices possible. The investors are not free to dictate the price since the sale is an auction in which the wealthiest private investor becomes the buyer by out bidding the rest of the interested parties. Following this form of privatization, if the entire airport is sold out, the management may be entirely changed by the new owners (Villard & De La Camara, 2012). Benefits of Airport privatization In most cases, government managed organizations are run through bureaucratic policies (Chowdhury, 2006). Most of the government owned airports are only renovated or developed when their performance decline becomes politically evident. Privatization rings in a new management that is performance driven. Private managements are self driven to attain their stakeholders’ goals. Airports that have been privatized undergo an organizational culture change which is essential for employees’ efficiency. The new management also works under a fully capitalized plan since the budget is normally full financed by the private sector. The fact that allocation of funds is not politicized in the private managements makes the airport’s development faster. The funds are used for specific programs without the planning being questioned by other people. Government airports fail to develop due to lack of harmonizing in development ideas. The government management may be forced to hold up improvements since the government normally pays for maintenance. The profit collected from state managed airports is used as revenue to finance other government projects. This leaves little funds for improvement of the airports. Private managements on the other hand are improvement oriented. They invest in the installation of the newest technology in the market to entice travelers to use their services. The improvement in the quality of services raises the standards of privatized airports. Managers in the privately owned airports are compelled to deliver to their stakeholders’ and customers’ expectations. This is a good response to the ever growing international airports competition (Poole Jr., 2000). This pressure on the shoulders of the management dictates that they become accountable unlike in the state owned airports in which the possibility of corruption is high. Accountability ensures that the quoted development plans are genuine and the funds are not misappropriated in any way. This is only possible if an airport’s management is private to avoid political manipulation that is evident in the state owned organizations which leads to biased decisions in the planning process. Government managed airports and firms are normally used as political tools whereby those in power strive to manipulate the entire management processes. The airports fail to focus on the main goal which is economic growth. Instead, they major in satisfying the influential politicians’ selfish goals. Politicians have been known to influence frequent management changes in airports when the existing managers fail to follow their will. The influential people may even cause nepotism in the airports leading to the employment of incompetent staff in the airports. Privatization addresses this challenge among airport managements. The employment process in the privatized airports is done in a transparent way and the most qualified people are employed to chase the goals of the stakeholders while satisfying the demands of the customers (Megginson, 2000). Privatized airports are better in raising capital than the government managed airports. One of the biggest challenges faced by government airports is the lack of capital to invest in infrastructure and airport development. In the capital markets, privatized companies are given priority by lenders since their interest rates are normally higher than lending to the government. When a privatized airport acquires a loan from a lending agency, this poses a great challenge to the management since it has to repay the amount as fast as possible to reduce the cost of borrowing. This acts as an incentive for the employees within the privatized airports to work hard towards increasing the profit margins (Villard & De La Camara, 2012). Privatization of the airports through share issue encourages investment from the local people. This makes them feel as part and parcel of the economic growth. It is also a good way of promoting democracy in a nation since the share holders are allowed to air their views in every decision made by the management. The share capital generated from the share issue process may be allocated to other investment programs by the airport management to increase the profit made. Naturally, privatization of a company always results to an increase in profits and expansion. The competitiveness of privatized airports is due to the fact that the managements adopt management policies that are destined to achieve the stakeholders’ goals. Disappointing on the part of a manager in a private company is never an option (Villard & De La Camara, 2012). Limitations of airports privatization Privatization of airports to foreign investors may be received by the public negatively especially if the assets sold have sentimental value to the people. Some airports built by the government are a pride of the citizens since the government used their revenue. The people may find it better to stabilize the government and to enhance integrity in the airports management instead of privatizing them. A change in the incompetent airport management would pilot the airports towards profit increase if the available funds are not misappropriated. This would translate to the entire profit being available for the government, unlike the privatization case whereby the government shares the profit (Zabalza & Matey, 2011). The government places the majority of the people’s needs first in everything it does in a democratic setting. This means that the state airports tariffs are adapted by the government to suit the needs of the public. In privatized airports, the managements only have to attain the goals of the stakeholders, whatever the cost is. This means that the public does not have any influence in the local airports; thus they have to adhere to the monopoly of the privatized airports (Zabalza & Matey, 2011). A government has the ability to acquire the necessary funds to transform an airport into world standards through a competent management instead of privatizing it. Privatizing of companies may be viewed as a way for the government to escape its responsibilities to single handedly jump start the economy for the people. Privatization of airports around the world has led to the inevitable loss of employment. When an airport is privatized through the asset sale method and the entire airport is handed over to a new private owner, the management divinely changes. Change in management means that the existing management and its staff are sent out unceremoniously and a new management is set in place. There could also be chances of layoffs to reduce the airport management liabilities. This leads to an increase in the unemployment rate in a nation, which is contrary to what the government should be doing in the first place. Most privatized companies have their focus on short term goals and this leads to constant downsizing when the management is faced with the slightest obstacle towards profit maximization. Privatized airports serve the needs of those with the ability to pay for their services. As the airports develop, they start looking into ways of making record profits. In the process of achieving this, their services may become unaffordable to some people in the public (Zabalza & Matey, 2011). In every process of privatization, there are parties which gain and there are those that lose. The loss may be particularly huge on the locals. The privatization of the management of one airport in a nation for instance, may render the rest of the airports in the nation bankrupt on a long term basis. The privatized airport may develop to monopoly extents, forcing the rest of the airports to close down or significantly lowering their profitability due to the high competition. A government that privatizes its companies opens doors for monopoly in the future in the given business area. This may lead to an increase in unemployment when the suppressed companies decide to layoff some of their employees to fit in the competitive zone (Zabalza & Matey, 2011). Conclusion Airport privatization is a move that is normally meant to uplift the standard of an airport when the state management finds it impossible to run the facility in a profitable way. Many airports privatize to gather enough capital to fund their development projects to attain the world class standards. The most common privatization method is through share issue which is done via the stock market. There is also the asset sale method which is used by governments who wish to transfer part or all the assets in airports. The two methods have their pros and cons. The pros normally outweigh the cons but the public seldom appreciate the benefits when the limitations are all too clear. Governments have the potential to self improve the airports in their area codes but sometimes the circumstances may force them to privatize. While many companies in the world are going private, airports have not been left behind. The competition bar is being raised higher as the days go by. This is all for the benefit of the travelers. References Chowdhury, F. L. (2006). Corrupt Bureaucracy and Privatization of Tax Enforcement. Dhaka: Pathak Samabesh. Friedman, A.L. &Miles, S. (2002). Developing Stakeholder Theory. Journal of Management Studies, 39(1), 1–21. Frost & Sullivan. (2006). Airport Privatization. Market research. Retrieved from: http://www.marketresearch.com/Frost-Sullivan-v383/Airport-Privatisation-1286859/ Megginson, W.L. (2000). The Long-Run Return to Investors in Share Issue Privatization. Financial Management, 29(1), 67-77. Poole Jr. R.W. (2000). Another reason for Airport Privatization. The Freeman Ideas on Liberty. Retrieved from: www.thefreemanonline.org/features/another-reason-for- airport-privatization/ Villard, P & De La Camara, J. (2012). 'Case Studies on Commercialization, Privatization and Economic Oversight of Airports and Air Navigation Services Providers' - A tool for policy-makers, policy analysts and practitioners. Journal of Airport Management, 6(2), 133-140. Zabalza, K. & Matey, J. (2011). Privatization and Changes in Human Resource Management: Evidence from Spain. International Journal of Human Resource Management, 22(8), 1741-1764. Read More