Fitch Ratings-New York-20 February 2018: The Trump administration's plan for U.S. infrastructure unveiled last week could provide regulatory easing and a fresh infusion of financing options across U.S. airports, according to Fitch Ratings. However, acceleration to full airport privatization within the sector is unlikely.
Among the concepts highlighted in the plan are:
--Streamlining regulatory steps for implementing critical airport-related projects;
--Creating efficiencies at the FAA;
--Encouraging private sector partnerships with alternative delivery methods.
From a financial perspective, the infrastructure proposal would dedicate federal funding for capital projects which airports may tap. An influx of federal funding would also help ease borrowing costs through expansion of TIFIA budget authority and broaden the eligibility of tax-exempt, private activity bonds.
The plan is not likely to lead to increased privatization of U.S. airports, which by and large have responded tepidly to this model. The current federal pilot program to facilitate private sector handover of airports has not resulted in any material results. Recent projects such as the LaGuardia Central Terminal redevelopment and the Denver Great Hall project are examples of alternative project delivery without full transfer of assets via sales or leases. Based on discussions with many of the U.S. airports with major capital programs, there are only a few additional proposals underway for privatizing major core facilities. In Fitch's view, greater acceptance by local municipalities as well as a strong value proposition where both the public and private sector will see long-term benefits is required for privatization to gain more traction.
Another proposal with the Trump infrastructure plan is the authorization to divest federal assets where they could be better managed by either state and local governments or private entities. More specifically, the two major airports serving the Washington DC metro region, Ronald Reagan Washington National and Dulles International airports, were highlighted as assets that could be potential candidates for divestiture.
Fitch views the sale of any major U.S. airport to be a challenging endeavor with many stakeholders in the private and public sector to satisfy. That said, the two Washington DC-area airports face even more difficult steps to work through to effectuate a divestiture.
Both Reagan National and Dulles airports are governed and managed by the Metropolitan Washington Airports Authority (MWAA), an entity created by an interstate compact between the Commonwealth of Virginia and the District of Columbia. The airports authority entered into a lease with the federal government in 1987 for a period that now extends through June 2067. The land and initial assets from 1987 are property of the federal government; however, the improvements from capital investments since that time are MWAA's property until the expiration of the lease. Since the lease is structured to be non-cancellable, without the approval of all parties, the federal government on its own is not able to sell airport assets prior to lease expiration.
Further, the sale of these two airports would need to address the repayment of MWAA's outstanding debt related to the airports (current balance of approximately $4.5 billion). Given the relatively large debt burden and the need to have the liabilities paid off to effect a sale, the economics of the transaction could pose a challenge for interested private or local sector parties. Another consideration that would also need to be considered is the effects of a sale while airline lease agreements are in force (expiration is 2024). Airline payments are a primary revenue source to recoup the operating and financing costs at the two airports. Also, federal restrictions on revenue diversion, which is not addressed in the infrastructure plan, could pose a barrier to any airport asset divestiture proposal.
While the airport sector can benefit from a robust plan to support the rehabilitation and expansion of airport facilities across the country, the real need is greater financial flexibility balanced by sensible regulatory oversight. Privatization is likely to see increased traction, primarily for project delivery and risk transfer. Still, the current proposal on its own may not result in accelerated action until all sides can identify clear values and benefits.