Airport makes reservations with private firm
The Indianapolis International Airport needed help. with no market incentives to function efficiently, the airport simply accessed fees by calculating its annual budget, subtracting revenue received from parking, concessions and other services and charging the difference to the airlines.
If expenses went up or revenue went down, the difference was merely passed along to the airlines, and this increase was eventually passed along to their passengers.
The airport needed to boost its economy in order to survive, and privatization seemed like the right solution. So in 1994, the airport authority board of directors took the dramatic step of seeking competitive proposals from private companies to manage the system.
With private management efforts, more than 60 government services would be forced to compete with the private marketplace within the airport so the city requested a contract calling for astreet pricing,, provision, figuring that the pressure of competition squeezes more economy and service improvement even the best functioning government agencies.
The city awarded the management contract to the British Airport Authority, USA division (BAA USA), which owns and operates London’s Heathrow Airport and six other airports in the United Kingdom.
The company guaranteed $32 million in savings to the city over the 10-year term of the contract, agreeing not to be paid until the first $3.2 million of savings is realized.
To achieve those revenues, the company plans on increasing productivity by applying current technology trends, such as cashierless public-parking; bringing in experts from the United Kingdom experienced in handling problems of larger airports to act as consultants to the smaller airports in streamlining operations; including recognizable restaurants such as T.G.I. Fridays and McDonald’s with prices competitive to those outside the airport terminal@ developing retail shops (11 new retail stores will open at the airport within the next year); and adding property management by providing cargo facility space and aircraft storage space.
The city estimates that the airport cost-per-enplaned passenger, the standard industry measure of efficiency, will drop from $7.78 to $5.19, a 26 percent reduction, by the year 2005, partly because of increase in revenue from the terminal business. “Where you have lower airport costs, you’ll have lower fares,” says Michael Boyd, president of Aviation Systems Research, Golden, Colo.
The resulting lower airline fee will benefit the airline industry as well. If revenue from airport parking, concessions and retail facilities increases, the margin of airline fee expenses charged by the management company can be lowered, thus attracting more airlines to the airport.
Privatization creates competition and forces creativity. The city of Indianapolis benefits from private management as the airport continues to grow.By having an outside firm manage our airport, the city is setting a trend in the airline industry,” says Betty Johnson, a member of the airport authority board.
This article was written by Indianapolis Mayor Stephen Goldsmith.
