Can you explain what FAA’s Airport Privatisation Pilot Programme entails and why it was launched?

Michael Fleming: Most US airports are publicly owned and operated, but, in 1996, the FAA launched its Airport Privatisation Pilot Programme (APPP) to test whether privatisation could succeed in the US – as it had in Europe – by relieving participants from the prohibition on revenue diversion.

Revenue diversion requires that income generated at airports be used for airport operations and development. Its purpose is to prohibit municipalities, which own and operate most US airports, from taking airport revenue off-airport and using it for other purposes, despite having received FAA and other federal support intended for the airport.

This unintentionally prevented the type of airport privatisation happening in Europe. The APPP was established to increase private sector investment by offering relief, albeit limited, from this primary legal constraint.

How does the programme add value to airport sponsors and lessees they otherwise would not have?

In 2014, the US Government Accountability Office set forth three reasons for privatising airports: enormous forecast capital costs, privatisation of airports around the world and the belief that private owners could operate airports more efficiently. The goal was to marry private capital and expertise with public infrastructure to enhance development and efficiency.

The challenge has been to ensure continued high-standard development and operations, while protecting against monopolistic rent-taking by the lessee.

There are several such protections in the programme, especially on rate increases, and sponsors will likely wish to layer on additional protections in the transaction, particularly in terms of ensuring high-quality operations and appropriate capital improvements during the long-term lease (precedent transactions have involved 40-year leases). Commercial service airports can only be leased, not sold, under the APPP.

Potential lessees are mainly strategic investors or financial investors. There is a supply-demand imbalance between available transportation infrastructure projects and large capital funds looking to invest. However, the chosen model has become the public-private partnership, or P3 approach, and the APPP falls under that label.

What do airport sponsors need to know about the programme?

These deals take time. The airport is a major asset and the APPP will involve a complex transaction. There are many intricacies in managing approval from FAA and locals, getting the airlines on board, defeasing bonds, negotiating and documenting the lease, as well as agreeing to a capital plan, working through environmental concerns and engaging with the community.

Perhaps the two hardest parts are getting the airlines on board (the statute requires 65% of airlines to approve, measured by number and landed weight), and getting the local political buy-in to move forward.

The programme does allow one thing that no other transaction can provide for US public-sector airports: repurpose revenue from the airport for general municipal use. This is attractive to public bodies, especially if the airport will continue to be developed to the highest standard.

What types of private sector deals can be done in the US without using this programme?

Although the US airports sector is primarily publicly owned and operated, the private sector has played a significant role by providing airport management services to the publicsector sponsor, developing various terminals and facilities, including airlines participating in unit terminal projects.

Many years ago, I worked on a private-sector investment in the US, developing the international arrivals building (now known as Terminal 4) at New York’s JFK Airport. The transaction involved a bond issuance of $1.2 billion. That’s a ‘terminal deal’. The private developer/operator developed the unit terminal only, while the sponsor – the Port Authority of New York and New Jersey – maintained airport operations.

However, with these deals, municipalities cannot fund non-airport projects with the generated income. To do that, it needs exemption from the revenue diversion restriction from the APPP.

The programme was launched in 1997, so what explains the renewed interest we currently see?

My view is that legacy US carriers were opposed to domestic airport privatisation, and the APPP gave them an effective veto power. This made it difficult for sponsors to move forward. Beginning in 2008 with Chicago Midway, followed by San Juan in Puerto Rico in 2013, the airlines, respectively, led by newer-generation LCC carriers Southwest and JetBlue, approved the transactions. These carriers are more likely to take an active role in the process to ensure their interests are covered and the airport is operated properly.

This new-found template for gaining airline approval, together with the potential financial benefits and availability of funding, seem to have breathed new life into the 20-year-old programme.

What are some of the legal concerns involved for those wishing to enter the programme?

In terms of general legal concern, this type of transaction will involve extensive due diligence. The private-sector lessee will wish to review all of the contracts, liabilities, exposures and labour commitments, meaning the public sector sponsor will need to assemble them. The transaction is much like any other major asset transaction, with some added complexity due to the nature of the airport environment and regulatory constraints.

Obtaining the requisite FAA approval requires adept legal guidance. The final application to the FAA is jointly filed by the public-sector sponsor and the private-sector operator, and contains a large amount of information, future plans for the airport, as well as the request for exemption from the revenue diversion requirement. TSA approval must also be obtained.

It is likely environmental liability will be an issue in any airport transaction. Most airports will have some level of contamination. The private lessee will not wish to take on this liability, but will be out working on the airport for decades, potentially leading to new exposures or doing work that impacts older sites requiring treatment. Drawing the line for this responsibility between the public and private parties must be done carefully.

Local legal approvals are also crucial. The FAA will require the public sponsor to demonstrate its authority to lease the airport, which will typically require a variety of local approvals, the most important of which will be authorisation of the lease by a political body, often a legislative branch.

Finally, the public finance element must also be carefully managed. The airport bonds will likely be defeased, and the private operator will be responsible for bonding in the future. But there are also typical state and local matching bonds or grants, and the legal team will need to work through the impact on the public body and on the transaction of transferring the asset.