Get Essay Help-BENEFITS AND RISKS OF AIRPORT PRIVATIZATION

Students are required to write a 2000 words individual essay- Discuss the benefits and risks of airport privatisation.

. Student must summarize key issues of that topic in their own words and critically comment on the theoretical aspects of the benefits and risks of airport privatisation (individual)

A paper of maximum 2,000 words is required.

Instructions

  1. are required to select 1-2 airports who is familiar with
  2. are required to identify airport ownerships
  3. are required to identify the type of airport privatisation
  4. are required to discuss the benefits of airport privatization
  5. 5. Students are required to discuss the risks of airport privatisation

Your report should have 1.5 line spacing.

Set your margins at 2.5 cm for left and right margins.

  1. Format- Individual Assignment

Each page of your assignment should include your name, student number, subject name, and number, page numbers and the assignment number.

Your report should have 1.5 line spacing. Set your margins at 2.5 cm for left and right margins.

You should include in your essay:

  • Q  A cover sheet with the title of your essay, the subject and your name/student number together with Assignment 1 Cover Sheet (see below)
    • Q  Abstract of 150 words
    • Q  An introduction
    • Q  Key definitions
    • Q  Brief background of your selected airport
    • Q  Themainbodyofyourassignment
    • Q  A conclusion, and
    • Q  Reference list (Harvard Reference Style Manual)
    • Q  Appendices

Below is a Sample Paper. You Can Order a Custom Essay Written From Scratch From Our Website. Click Here to Order.

BENEFITS AND RISKS OF AIRPORT PRIVATIZATION

Student’s Name

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Abstract

An airport is a significant part of the air transport since it provides for all the necessary infrastructures. Airports started out as government departments before commercialization and corporatization. The two processes gave birth to privatization as the states sought to make the airports a sustainable economic hub. This paper discusses Heathrow airport which was founded in 1946. The airport later becomes part of the large British Airports Authority (BAA) together with other six airports in 1965. Then as a group, Heathrow airport was privatized in 1987 by Margaret Thatcher through IPO. As a privatized company, the company has got benefits but at the same time serious risks. Some of the benefits of airport privatization are increased efficiency, leveraging of capital, and increased consumer satisfaction. Contrary, privatization is associated with risks of inaccuracy in future forecasts, estimation of capital, and even unacceptability by the consumers such as in case of Heathrow.

Benefits and Risks of Airport Privatization

Introduction

An airport is a significant part of the air transport network which evidently provides many advantages to the users and the wider economy. The airports provide the basic infrastructure which facilitates the change of goods and passengers from the land transport to the air one. Additionally, they enable the airlines to take off and attend to the air fleet. The airports comprise of the taxiways, passengers and cargo terminals, runways, and aprons. Some of the services provided in the airports are air-traffic control, fire brigade, and commercial services such as restaurants (Singh, Dalei, and Raju 2015, p. 414).  Apart from a link between the providers and consumers of air transports, airports are considered as the key element of the local economy.

Notably, there is an inherent need to deliver quality and efficient service levels to the consumers though that does not mean that it should be unprofitable. As a result, over the years, there is a mutual interest of not only efficient services but also sustainable growth. The airports have led to privatization to achieve the two goals at the same time. Consequently, such process must involve the key stakeholders of that particular airport. Apparently, if the government decides to privatize an airport, then they might be sure that the decision will not benefit the industry but also the consumers (Aulich 2014, p. 2). In short, the privatization of the airport is not a short-term but rather a long-term strategic decision for economic development.

Key Definitions

  • Airport Privatization: it refers to moving part or the whole of the airport ownership to the private sector.
  • Commercialization: it refers to the process through which an airport is transformed from the being a public utility to a commercial enterprise through an adoption of the approaches, values, and philosophies.
  • Corporatization: it is an establishment of the airport as an independent legal company that is wholly controlled by the government or the local authorities.

Background of the Airport

Heathrow

Heathrow Airport is part of the British Airports Authority (BAA) together with six other airports. According to Heathrow (2017), Heathrow airport was founded in 1946 in the village of Heath Row. The first aircraft to take over in this airport was Lancaster bomber also Starlight. The passenger terminals were ex-military marquees on the Bath Road, and the passenger footpaths were wooden duckboards. BAA was founded on 1965 owning and operating three major airports in London, Heathrow, Stansted, and Gatwick and fourth on Prestwick in Scotland (Graham 2013, p. 34).  All the airports were state-owned and controlled as departments. Heathrow was the major airport which by 1985 was handling 30 million passengers and most profitable together with Gatwick. Notably, BAA owned the airports; however, most of the services to the passengers were given by individual airlines and other enterprises. In short, the BAA was the least employer compared to the other partnering companies (Parker 2013, p. 47).due to its excellent performance; the Airports commission suggested that Heathrow should expand in 1st July 2015 to maintain UK status of global aviation hub as the best option. Notably, the Heathrow UK center has been operating 98% capacity of the global air transport for a decade now, and thus, the need to increase its capabilities so that it can cater for an additional 260,000 flights (Heathrow 2017). 

Body

Airport Ownership

Initially, the airports were a fundamental part of either the national or military systems. However, after the World War II, there was the development of the passenger airports particularly in Europe although there were similar to those of the military. The airports were slowly transferred to the state authorities while expanding their infrastructure for civil use (Parker 2013, p. 47). Nevertheless, over the time, the people and officials started treating the airports as public goods rather than competitive organizations. As a result, the airports gradually became independent of the government.  Consequently, in many cases, the government undertook corporatization and diversification of the airport into state entities in different levels. At this level, the airports could make local strategic business decisions and stopped being only considered as a provider of the transport infrastructure.  In no time, many governments realized that the airports could be changed to commercial business (Turner 2014).Tang (2016, p.11) observed that the Heathrow was privatized by Thatcher when she ordered the listing of its shares on the London stock exchange in 1987. Until, 1996, the British government owned some stake of BAA when they sold it to the foreign investors. Apparently, the organization retained a “golden share” that prevented its takeover by foreigners until 2003.

Type of Airport Privatization

Graham (2013, p. 21) the current trade in the airport industry is privatization; however, it is hard to understand the different types of privatization. Many authors have described the term but each type a different meaning is given. Some argue that the process involves the transfer of ownership to the private sector, while others suggest that the procedure only requires the top management. As a result, there are many concepts of privatization based on the governance and models that are available. The major privatization models are as follows;

The first one is share flotation which involves issuing of the company’s stock and subsequently trading it on the stock market (Graham 2013, p. 22).  Further, the author terms this type of privatization as an initial public offering (IPO). Surprisingly, only BAA has ever undertaken 100% share flotation in 1987 although it is already de-listed. Other airports such as Vienna airport conducted partial IPO. Share enables the government to transfer full or partial ownership as well as the economic risks to the new shareholders. The other option is ‘trade sale’ where the airport sells some or the entire airport to a business partner or a group of investors through public activities such as tenders (Graham 2013, p. 23). Graham (2013, p. 24) further emphasized that the winning operator is allowed to bring investment to the company as well as takes on the operations, financials, commercial, and construction developments.

Nevertheless, the capacity influence matches to the maximum stake of each shareholder. The first significant sale occurred when the Liverpool sold a 76% to the British Aerospace. Notably, trade sale allows the airports to be sold at a higher cost than the IPO because there is the future creation of performance confidence (Graham 2013, p. 26). Graham (2013, p. 26) stated that the other type of privatization is concession where an airport management or investors purchase a lease to operate part of the privatized airport for a specific period. The time duration ranges from 20 to 50 years and is acquired through tethering process. This process is complicated, has high costs, and requires significant attention while developing the terms of operations (Tang 2016, p.2). There several models of concession which can be; rehabilitate, operate, and transfer (ROT), lease or rent and transfer (RLT). Moreover, the financial conditions vary depending on the initial cash flow.  This form of privatization has a risk of allocation between the government and airport operator among other hazards such as terrorism.

The other option is project finance where the company is allowed to build and sometimes redevelop the airport operations or even a particular part of the airport such as the terminal for a specified period usually 20-30 years (Graham 2013, p. 30). In this type of privatization, an airport can be private or public-private organization. At the end of the period, the ownership is reversed to the government. Notably, this form of the property mostly occurs during large investments such as the development of a new airport or other facilities (Tang 2016, p.2). An example of the major examples is the construction of the Toronto’s Lester B. terminal 3. The management contract is the least radical since it transfers the control while the ownership remains with the government (Graham 2013, p. 30; Tang 2016, p.2). It is a form of contract, where the contractors control the daily operations for around 5-10 years (Graham 2013, p. 31).

Benefits

Turner (2014)argued that the benefits of privatizations are evident especially among champions. These advantages are operating efficiency which, in turn, boosts the revenues.  The step is facilitated by the forensic cost-cutting and the increased competition that comes with commercialization. Additionally, there is a consumer-oriented management accompanied by excellent marketing skills that allow the airports to attract and retain consumers. Finally, privatization leads to better investment decisions which are facilitated the fact that the airports are treated and governed as corporates. Further, Tang (2016, p.10) stated that privatization enables, the airport to attract a sufficient level of funding from private investors which could otherwise be impossible under the government. The funding, in turn, allows the airport to construct and for it to maintain its activities during operations. 

Zhao, Choo, and Oum (2014, p. 114) also confirmed that the government-independent authorities achieve higher efficiency performance technically and costs because of their ability to operate like the commercial business. On the other hand, Aulich (2014, p. 7) argued that depending on the country, there is a possibility of increased retained profits for an organization. Nevertheless, the gains might be short-term so the need for proper prior planning. Additionally, privatization allows foreign investment which would be very difficult in the hands of the government. Finally, the company which acquires the other, such as Brisbane has a likelihood of paying low taxes.  Further, Parker (2013, p. 54) argued that airport privatization has significant benefits such as increased leverage capital that can be used in the construction of the new infrastructure. Also, there is raised customer satisfaction due to consumer experience focus, and creation of dynamic workforce attained through extensive staff training as well as internationalization. Other benefits include increased transparency, spread ownership, and flexibility.

Risks

There are potential risks linked to airport privatization which includes the following. The first risk is value judgment which according to International Airport Transports Association (IATA) should be greatly scrutinized. Accordingly, a government should consider the value of its activity and therefore should not rush to privatization through processes (Turner (2014).  Heathrow then BAA faced harsh criticism from its airlines, politicians, and consumers due to the overcrowding and delays that were as a result of Spanish Multination Ferrovial 10 billion Euros take over. Evidently, the British government sold the Heathrow airport without appropriate guidelines, and that is why it failed.  Though the Spanish investors enjoyed a 42%, the people of London suffered due to terminal facilities (Turner 2014). Additionally, Graham (2013, p. 40) argued that all parties involved in the privatization process are faced with certain risks depending on the level of privatization. The risks mostly fall in the accuracy ability to forecast the future air traffic; estimation of the cost of capital and income, and capacity to change the legislative and economic conditions.

 Notably, the investors come from varied places, and therefore, there is a risk of whether or not, they can raise sufficient money to pay for the investment costs. Additionally, the investors can be frustrated by the technical parameters, political and legislative conditions.  Singh, Dalei, and Raju (2015, p. 416) supported that the government and the public authorities are at the risk of inability to make economically rational and needed decisions when it comes to privatization. Additionally, they are at a risk of inadequate and poor quality investments. Since airports are monopolies, they are at the risk of exorbitant charges and air in the hands of the private investors. Finally, there is a possibility of the hostile takeover, ecin particular on a regional platform.

Conclusion

Airport privatization is an ongoing process since there is an allurement to investment in the market and the governments find it more productive. Nevertheless, each airport privatization should first undertake a sufficient research to understand the type of privatization would work better. Notably, there are several types of privatization such as concession, management contracts, trade sale, IPO, and financing option.  This paper looks into Heathrow airport and discovers that they are benefits and risks that are associated with privatization. Heathrow privatized in 1986 through IPO. Though there were benefits such as increased profit levels, there were also risks such as value judgments from the consumers who felt that the government appreciated finances than their well-being. In short, airport privatization needs critical investigations to achieve a sustainable contract. All the stakeholders should benefit from the process.

References

Aulich, C. 2014. Airport Privatisation in Australia: A Tale of Three Cities. Applied Finance and Accounting, 1(1).

Graham, A., 2013. Managing Airports 4th edition: An international perspective. Routledge.

Heathrow. 2017. Our history | Heathrow. [online] Available at: http://www.heathrow.com/company/company-news-and-information/company-information/our-history [Accessed 23 Aug. 2017].

Parker, D., 2013. The Official History of Privatisation, Vol. II: Popular Capitalism, 1987-97. Routledge.

Singh, D.P., Dalei, N.N. and Raju, T.B., 2015. Airport Privatization and Economic Regulation: An Indian Experience. International Journal of Multidisciplinary Research and Development, 2(5), pp.414-418.

Tang, R.Y., 2016. Airport Privatization: Issues and Options for Congress. Congressional Research Services.

Turner, J. 2014. Too high a price? The risks and rewards of airport privatisation. [online] Airport Technology. Available at:

Too high a price? The risks and rewards of airport privatisation
[Accessed 23 Aug. 2017].

Zhao, Q., Choo, Y.Y. and Oum, T.H., 2014. The Effect of Governance Forms on North American Airport Efficiency: A Comparative Analysis of Airport Authority vs. Government Branch. In Journal of the Transportation Research Forum (Vol. 53, No. 2, pp. 93-110). Transportation Research Forum.

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