Why and How Airports Would Perform Better Under Private Hands - Example

Running header: Airport Privatisation Student’s name: Instructor’s name: Subject code: Date of submission: Why and how airports would perform better under private hands. Everyone knows the effects of flight delays as well as airport security. These may include the missed connections, hassles of undergoing screening, and the annoyance of showing up so far in advance of the scheduled departure time. In aggregate in our country alone, the above costs are estimated at over forty billion dollars per year. In addition, air ticket prices keep on rising while there are periodic reports of security breaches for instance weapons which screeners don’t see have undermined public confidence in our airport system. But is there a remedy for this? Travelers seek value, convenience, friendly prices as well as safety. Ideally, aviation infrastructure policy ought to reduce travel delays, enhance competition and guarantee travelers safety all at the lowest possible cost (Dwyer, and Forsyth, 2002). What we see however, is the failure of our publicly owned and controlled airports and the federal air traffic control systems to be innovative. This arises from the scarcity of economic incentives as well as the multitude of institutional and political constraints. This therefore implies that we need to restructure our air port system systems so as to make them better. This paper is aimed at analyzing why and how our airports would be better handled by the invisible hand of free enterprise in order to make them perform better. Need for competition Privatization of our airports will bring about the much required competition in the industry. If one doesn’t like the price and the quality offered by airport A , then there will be choice for using alternative B. it is no doubt that entrepreneurs will try to offer a better combination of price and performance in a bid to appeal to those frustrated by today’s typical airport service. Indeed, such alternatives exist. For a large number of travelers, the low fare, no frills yet highly reliable Southwest service is a viable alternative. On the other hand, some may find Midwest express a more viable option as it offers much more luxurious service although at higher prices. However for millions of air travelers, innovative airline service offerings are hard to come by. Our airports are still run in an old fashioned, bureaucratic, static manner typical to the deregulation era(Favotto, I., Kearney and Kriesler, 2004) .Their management is more passive and risk averse than that of the world’s fast growing body of privatized airports which are now more than one hundred. Such privatized airports include those in Auckland, Buenos, Aires and Rome. Privatization is therefore a good way of breaking away from inefficiencies and a sure way of achieving growth in our airports. The government should therefore privatize the industry so that entrepreneurs may provide the so much required alternatives. Efficiency Privatizing airports will greatly enhance efficiency in our airports. This will till the industry of its much inefficiency. In privatizing the airports, policies that enhance airport system performance should also be instituted. This would include the following:- (a) Privatization will help in replacing the ground based radar systems with more accurate satellite communications. This would in turn make travel faster and safer. Travel time would be greatly reduced since airplanes will fly closer together and take the most direct routes. (b) Privatization of airports will help in funding of new runways. The funding of new runways and terminals will be based on market based, rational amendments which will be based on benefit from additional runway investment rather than waiting for government funding which is greatly determined by the prevailing political forces. (c) Privatization of airports will lead to improved but cheaper services. This is because the restrictions which prevent carriers from using certain airports will be removed (Johnson, 2005). For instance, in the current scenario, travelers encounter a lot of difficulties when incumbent carriers are allowed to slot new entrants into gates only at inconvenient times and locations, at excessive costs, at times travelers are prevented from accessing the gates altogether (Kriesler, 2006). This in no doubt causes a lot of inconveniences and makes travel costly. The solution to this could only be found in privatizing our airports. (d) Privatizing the airports could also be a way of overcoming terrorism in our airports. Although innovative solutions to curbing terrorism exist, they are unlikely to emerge in government bureaucracy like the transportation security administration. Israel for instance has avoided the problem by identifying suspicious passengers. Private security firms, also provide effective security in Les Vegas. Although air travelers continue to get the sub optimal services provided by our airports; infrastructure facilitation, regulation as well as political forces continue to make reforms in our airports difficult. The federal Aviation administration does not have organizational independence, since it’s prevented by congress as well as the administration from efficiently using its resources. For example, peak period pricing for air traffic control was blocked by pressure from owners of corporate jets. Furthermore, political pressure is the primary source of inefficiency witnessed in our airport systems. In order to overcome the inefficiencies and political interferences, we need to privatize our airports. Owing to the predicted continued growth in air travels innovations are imperative. However, under the current system, it is difficult to have improvements. It is only by privatizing our airports infrastructure that we will have constructive reforms. This is because by operating in more competitive environments, the privatized airports and air traffic control will have incentives to improve services as well as reduce the cost of operations while maintaining an outstanding safety record as well. Privatized airports will in addition facilitate great competition among airlines which will lead to reduced fares. It’s obvious that people would view privatization as drastic and potentially risky solutions. However, examples from other countries already exist. In order to increase investment in airport infrastructure, devoid of government funding, Canada quasi-privatized its airports in 1980s and transferred them to locally based non-profit organizations. The country’s airports are therefore able to build additional runways and terminals which greatly reduced congestion. In Australia and New Zealand, privatization of major airports began in 1990s with an aim of sharpening incentives for efficiency and lightening their regulation. Although the prices charged by the airlines today are high, they are well below monopoly levels and the airports are considered to perform better than monopolies. United Kingdom’s airports infrastructure are mainly privatized despite the fact that regulatory burdens are still persistent, air traffic control services are now sourced from a public-private organization which took over from the former agency in 2001(Paddon and Carman,2009). China on the other hand departed from a paramilitary organization to a system of privately controlled airports. The liberalization contributed to dramatic growth in air traffic, increased airline productivity, increased competition, increased air safety and heightened investment in infrastructure. Although the above examples cannot fail to have their own shortcomings, they are a prove that apart from having an adverse effect on airport, system performance, privatization has a lot of benefits if well considered, the experiences of other countries after potential solutions that our policy makers could adapt to our circumstances. Privatization promises better value in air travel in terms of more convenience, lower prices and higher level of safety and is therefore with trying. Despite the above benefits that would accrue from privatization, we cannot assume that it will not have some shortcomings. Privatization of the airport would result to a number of inefficiencies in the industry. Problems of privatization arise quite as early as the enforcement stage. It does not guarantee that the contracts will go to the best companies which are able to do the job more cost effectively and yet provide high quality services. Companies with good lobbyists and political influence often get the contracts. Potential supplies may initially offer prices that are way below their production cost thus induce the government to transfer the service to the private sector. They then begin to ask for higher prices much later after the government has already dismantled its own production system. This is because they tend to form monopolies (Rowthorn, and Chang, 2002). Monopolies refer to firms that are single in the entire industry. Monopolies are associated with charging high prices and offering rather low quality services due to lack of competition. It would therefore be unwise to privatize it because it would result to consumer exploitation. The consumers will be forced to pay very high prices for the services. Therefore, only consumers of high social status in the society will enjoy prestigious services while the middle level and the lower class may not enjoy the services at all. This will result to slowing down of economic growth and development as the business people relying on that mode of transportation may lose out. They will be forced to raise the prices of their goods and services to cover for the expensive travel and transportation expenses. This will result to a decrease in demand of the goods and services thus lower return on investment. The costs of imports will also increase therefore resulting in increased cost of production. The prices of exports will increase and the countries buying the goods and services may source from other countries therefore reducing the balance of payments. Moreover, the excess capital meant for re-investment will be lower thus less economic growth and development. Affordable travel rates will also encourage activities such as tourism as affordability of flights is key to tourists as well as value for the money they pay (Saunders, 2003). The government is able to offer subsidized travel rates and discounts while companies may not as their sole purpose is profit maximization. Growth in tourism results to increased economic growth and development in the country. Privatization of the airport will result to increased public borrowing in the long run. The government will no longer benefit from the profits it was making before the privatization. The income that would have been obtained if the government was running the airport will be used to increase the value of public goods and services such as free medical care, security, education facilities and infrastructure among others. Although the government will receive a percentage of returns in form of VAT- Value Added Tax or corporation tax, it would be in a better position to raise more money if the airport is not privatized. Moreover, the government is able to provide more employment to its citizen as compared to a private company. This is because the sole aim of company will be maximizing profits and they are keen to cut on any unnecessary cost as compared to the government which may retain many workers with the aim of reducing unemployment. In the recent past, privatization comes along with layoffs of most public sector workers; the government is not able to reassign all of them to other government jobs or other private contractors (Stegman, 2004). The government places them on early retirement programs which basically sustains them for a limited period of time after which their standards of living suddenly decline. This will also increase the level of unemployment and the problems associated with unemployment such as illegal activities, security issues and prostitution will be rampant. The government will therefore seek aid to run its budgetary activities if it experiences a deficit. This will result to increase in public debt and interest for the government which will be imposed on the citizens as they acquire goods and services in form of value added tax or through other means. The government is able to back up its activities when it makes a loss. A private organization on the other hand has the risk of facing bankruptcy with continued loss making. The government may seek funds elsewhere to boost the performance of a poorly performing organization at very little or no cost. A private firm on the other hand will experience a lot of difficulty in accessing funds from the financial institutions. Moreover collateral is required to obtain such funds and they may be required to pay higher interest rate to cater for the risk involved. The government has a larger pool of funds. It may also borrow from the world banks and other international financial institutions while a firm is limited in terms of where it can borrow money. Privatization of the airport may result to less transparency in the operations of the business. Most firms that win the contracts especially in the long run tend to cut corners and start making super normal profits at the expense of the citizens. This is very rampant mostly in cases where there are no specific reporting criteria. The operations of the airport may be hard to control and monitor. For instance, seven people died as a result of water testing in E. coli, Ontario in May 2000 after the privatization of water testing. This might have been averted if proper monitoring procedures had been strictly followed. This information was not realized to the public until far much later when it was too late. Such firms will also defraud from the government taxes and other fees (Williams, 2006). The shareholders well being will also be at stake as the directors may engage themselves in excessive perquisites and perks at the expense of the shareholders wealth maximization. Consumers may not benefit as much as they hoped from the privatization of the airport. The government is forced to create regulators to check on consumer exploitation. It would be completely hard to create another airport just to create competition to the existing monopoly. This is due to the capital required, man power as well as space (Woods, 2001). The nationalized industries are sold off quickly and at much lower costs thus the government only generates a percentage of the revenue. A wider share capital is also not achieve as the small investors sell their shares, take the profits but they do not re-invest. Moreover, some departments require social security which can only be done by the government such as traffic management and the police department. In conclusion, privatization of the airport has both disadvantages and advantages. The advantages of privatization however tend to take the lead. For instance, provision of goods and services tends to be more accurate and there is a lot commitment. This is because their basic performance evaluation is the profits which must be achieved. Secondly, more revenue is generated by firm’s privatized firms than the government and therefore the government will continue earning even after privatization. It also results to increased share ownership which facilitates uniform distribution of wealth. Lastly, privatization leads to competition and is thus beneficial to the consumers as it results to price reduction. It also encourages the development of new products as per consumer request. This also results to better quality of services provided. Private enterprises are more responsive to customer complaints and innovations. Therefore, the privatization of the airport will enable the citizens or consumers better customer treatment and satisfaction. I would therefore advocate for the privatization of the airport. References: Dwyer, L and Forsyth, P. (2002) 'The reform of air transport and its impact on tourism' in Forsyth, P. (ed), Microeconomic Reform in Australia, Allen and Unwin: Sydney. Favotto, I., Kearney, C, Kriesler, P. and Stegman, T. (2004) 'Network pricing versus location specific pricing of aeronautical services' with Economic Papers, June, Vol. 13 pp. 38-52. Johnson, M. (2005) 'Evaluating the privatization of the English and Welsh water industry*, The Economics and Labor Relations Review, Vol. 3 No. 2. Kriesler, P. (2006) 'Some issues in the analysis of investment in aeronautical services' CAER Working Paper: 994/2, UNSW. Paddon, M. and Carman, M. (2009) Paying the price of privatization: The Federal Government's FAC privatization proposal in 1994, Public Sector Research Centre, UNSW. Rowthorn, B. and Chang, H. (2002) 'The political economy of privatization' The Economics and Labor Relations Review, Vol. 3 No. 2. Saunders, P. (2003) 'Recent trends in size and growth of government in OECD countries' in Gemmill, N. (ed), Public Sector Growth: Theories and Evidence, Edward Elgar: Aldershot. Stegman, T. (2004) 'The pricing of aeronautical services by the Federal Airports Corporation, Australia: an assessment of the costs and benefits of a shift from network pricing strategies to location specific cost recovery CAER Working Paper 1994/3, UNSW. Williams, M. (2006) 'Privatisation (asset sales) in New Zealand', The Economics and Labor Relations Review, Vol. 3 No. 2. Woods, D.F. (2001) 'Determining general aviation airport system benefits' Journal of Transport Economics and Policy, Vol. 5 No. 3. Read More