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Fair game

Following the recent court case between the Chattanooga Airport Authority and TAC Air Facility over FBO competition at Lovell Field Airport, Tennessee, what happens when state- and privately-owned FBOs compete?

 

Few are willing to talk about the specifics of the Chattanooga competition case, which is interesting given the gravity of the situation for the airport, the cities it serves and the FBOs involved. Still, the lessons for other FBOs, airports and government authorities cannot be missed and offer a road map for the future.

In brief, the Chattanooga Metropolitan Airport Authority said, in 2009, that it received complaints about the high fuel prices at the TAC Air FBO at Lovell Field Airport, with which it had a long-term contract. It decided to drive competition by opening its own FBO when the entire industry was struggling with unprecedented fuel costs. What it didn’t appreciate was that FBOs do not operate in a vacuum – they compete with other FBOs in the area. In fact, according to published reports, Chattanooga had lower fuel prices than surrounding large airports.

But fuel price was the reason the Chattanooga authority used to spend US$5m in taxpayer money from state airport grants funded by fuel taxes to build its own FBO. In essence, the taxes generated by private FBOs such as TAC Air were being used to compete against it. The airport authority ultimately hired Wilson Air Center to compete with TAC Air.

In 2013, a federal administrator recommended dismissal of a TAC Air complaint to the FAA concerning the use of airport funds. The airport incurred US$1.3m in losses over three years at its FBO, ironically proving the point that there was just not enough business for two FBOs. The airport authority doubled down, ultimately purchasing TAC Air’s facility for US$12.4m in January 2014, merging the two FBOs. TAC Air and Wilson Air Center did not return calls from Business Airport International and the airport authority declined to comment.

 

Right: Is providing aircraft services an essential government function?

 

Digging deeper
The more one peels back the layers of the onion, however, it becomes clear that Chattanooga actually wanted the land under the TAC facility to open up a new parking lot, at a cost of US$16m to US$18m, in an effort to attract more air carriers so it could become a regional hub.

According to some local commentators, such as Chattanooga City Council member Larry Grohn, the airport is not suited to become a regional hub owing to its close proximity to major cities such as Atlanta, and its limited regional airline service. “This is a question of a community of 200,000 and a metro area of half a million thinking it was going to become an airline hub,” says Grohn. “It just wasn’t going to happen.” In fact, between 2007 and 2012, Chattanooga lost 7.9% of its annual commercial flights and 2.5% of its seats, according to a study by Massachusetts Institute of Technology, Trends and Market Forces Shaping Small Community Air Service in the USA.

Fair competition
This case raises the question of whether private and public entities can compete evenly in the FBO market. According to Douglas Wilson, president of consultancy FBO Partners, both taxpayers and customers suffer when public and private companies do battle. “The customer fails to be served in a manner befitting the intentions of efficient air travel,” he says.

“The competition does not change the FBO business model. What it may do, however, is cause FBOs to reconsider their relationship with their landlord – their airport. FBOs need to maintain a strong and positive working relationship with the airport authority or city, and continually demonstrate how they contribute to the healthy landscape of an airport.

“Sadly, however, the best relations in the world won’t necessarily prevent certain individuals within airport authorities or cities undermining that landscape at every turn in the form of higher and higher ground lease rates each year, flowage fees, concessions and the like; the aggregate of which takes an otherwise sustainable FBO and makes it a marginal business proposition.”

The growing competition from government-sponsored entities prompted the introduction of HR 1474/S785 Freedom From Government Competition Act 2011 (see Competition act, page 54), which required the federal government to procure services from private enterprise. While the National Air Transportation Association favored the legislation, Airports Council International-NA (ACI-NA) did not and so the legislation never passed. However, ACI-NA published Aviation Service Providers/Airport Sponsor Agreements Business Term Considerations for Capital Investment, a set of guidelines for airport/airport service provider leases that encourage long-term investment.

 

Left: Airport authorities need to consider the viability of their lease rates before putting out an RFP to private companies

 

Middle ground
The Chattanooga case also raises the question of whether providing aircraft services is an essential government function, and if so, whether a government entity should be in the business of operating an FBO. What funding mechanisms should prevail and how does a government authority ensure it maintains a level playing field? The answer, according to National Air Transportation Association president Tom Hendricks, lies in establishing minimum standards for the provision of airport services in order to avoid uncompetitive environments.

“The situation that ultimately devolved into the morass in Chattanooga is particularly illustrative of just how poorly state versus private-enterprise competition can end,” explains Wilson. “Yet it is far too polarizing and unproductive to conclude that airports, authorities and cities should never be engaged in the FBO business. It is evident that there are hundreds, if not thousands, of airfields in which there is insufficient traffic to justify a private FBO entrant in the marketplace. There
is a middle ground.”

To be sure, there is a place for government to provide airport services, according to Hendricks. They must do so, however, on a level playing field, and that is the hard part.

“The challenge is that every airport situation is unique,” he says. “Each has a different economic base and physical facilities. Several have used federal funds because there is not enough business to support private enterprise. We firmly believe free enterprise provides the best model for everyone involved. It is ultimately up to each community whether they want air service. Are they willing to pay the price with funding from the taxpayer? If so, that is fine.”

Wilson agrees: “Unquestionably an airport is a community asset – both literally and metaphorically. It represents the tangible manifestation of a community’s lifeline. To that end, if a private sector FBO fails, and there are no other private sector enterprises to provide FBO services, the public sector should step in. The biggest issue I continue to see arising in the public sector is the total lack of business failure contingency plans. A six-month fallback framework should be in place to seamlessly provide essential services while the matter of next steps is determined at the council level.”

For airports and city councils, the decision is complex. “Airport authorities should consider the viability of their lease rates relative to the given market and if sufficient demand exists for both based and transient customers alike,” Wilson advises. “As a rule of thumb, if the airport is an uncontrolled field, has a runway length of 3,500ft or less, and isn’t served by a precision instrument approach, you won’t find many private enterprises responding to such an RFP [request for proposals]. In that case, it may be the appropriate size for a public-private partnership of sorts. One such example at small airports is that the public sector owns the infrastructure and FBO, and they contract with a private company to run the FBO and airport on their behalf.”

In that case, cities must also consider other factors, according to Hendricks. Private enterprise is better equipped to withstand business cycles and the inherent risks involved in long-term liabilities. He also pointed to environmental risks, adding that aviation is a highly regulated industry, meaning taxpayers could be at risk.

“Private investment affords a lot of staying power,” he explains. “But FBO services require predictability and stability in order to make large investments in communities. That includes lease terms for facilities that can’t be changed because the authority might want to bring someone else in. And those lease terms have to be applied consistently across the board – another reason for adhering to minimum standards, which also helps promote an efficient business. If we create an environment where the competitive landscape is level, private enterprise should be given the chance. Otherwise, market forces get distorted and that results in more risk to the taxpayer.”

While private enterprise is more efficient, Wilson believes there are examples of good government management. “For example,” he explains, “an exceedingly well-run public sector FBO is McKinney Air Center in McKinney, Texas, USA. Ken Wiegand, who has exceptional business sense and extensive experience working with private FBO operators, chose to source an experienced general manager from the private sector, for the public sector.”

 

Right: Minimum standards for the provision of airport services are needed to ensure a competitive environment

 

Funding mechanisms
Hendricks cites the Advisory Circular published by the Federal Aviation Administration (FAA) as the key to leveling the playing field. It calls for minimum standards for aeronautical activities and reminds airports that have federal obligations under the FAA grant programs to conduct business that is non-discriminatory. It also requires the airport entity to be as self-sustaining as possible.

“If airports adopt the standards outlined in the Advisory Circular, they have mechanisms for establishing a level playing field,” says Hendricks. “It is key to managing the relationship between the landlord/airport and the business. But it is also necessary for the business to actively participate in the airport authority meetings, the creation of minimum standards, and the review
of those standards. We find where relationships are strong, the two can find the right balance and that results in success for both.”

Chattanooga has minimum standards for airport operations governing FBOs, but they do not seem to include key provisions recommended by NATA. The first would protect incumbent service providers from devaluation from new competition with substantially lower initial investments. The second would assure potential service providers of the ability to accurately predict the initial investment needed to assure business success. Finally, potential service providers should accurately reflect the market demand. Interestingly, Chattanooga’s own standards call for it to deny applications from new entrants if they require the authority to make investments “in connection with the proposed business, or if the operation will result in a financial loss to the authority”.

Wilson, however, is skeptical. “I know of no funding mechanism that truly levels the playing field between a public and private firm competing at the same airport,” he says. “Debts and surpluses notwithstanding, I believe it is the charter of most government organizations to be revenue neutral; that is the broader implication of tax policy in general.”

One of the key issues that remain unaddressed in all of this is the oversight role of cities when it comes to airports. At many airport meetings, airports express frustration at the control given to city officials, saying they could be much more efficient and innovative if given the leeway. So, if the relationships between tenants and airports must be carefully managed and fostered, so too must the relationships between city and airport managers. 

April 17, 2015

 

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