Can Airports Run Better? Private Equity Tackles Travel

Anyone who has navigated an overcrowded airline hub or sat on the tarmac for hours might wonder: Who’s running this airport and why is it so inefficient?

Research by Harvard Business School Professor Sabrina T. Howell suggests that many airports, which are largely government-run, would benefit from private equity ownership. While PE has come under criticism for wringing profit from public services, like hospitals and utilities, an analysis of 2,400 international and regional airports in 217 countries finds that PE firms can increase quality in airports.

“Privatization in general does not improve performance. However, private equity ownership has strong and persistent positive effects on efficiency, volume, and quality,” write Howell and colleagues in “All Clear for Takeoff: Evidence from Airports on the Effects of Infrastructure Privatization,” an article forthcoming in the Review of Financial Studies.

Howell, the Ogunlesi Family Professor of Business Administration, collaborated with Yeejin Jang, a professor at the University of New South Wales in Australia; Hyeik Kim, a professor at the University of California, Riverside; and Ohio State University Professor Michael S. Weisbach.

Airport data cited in the paper shows that about 60% of revenue comes from airline fees. Usually, the best way to boost earnings is to increase the number of passengers per flight and the number of planes using each runway and gate. The researchers found that:

• When private equity funds buy an airport, the number of passengers per domestic flight rises by 20%.

• Net income increases by 70% when a PE firm acquires public airports and by 20% when a conventional private airport transitions to a private equity fund.

• Previously privatized airports acquired by PE firms are more likely to win awards.

The PE ownership “appears to improve” overall airport quality, including indicators such as store quality, waiting areas, and cleanliness.

How PE changes airports

The authors identified mechanisms PE owners used to help performance:

• Airports charged higher runway fees after PE acquired them, but not more passenger fees. The move pressures airlines to use larger planes, which increases the number of passengers per flight.

• Runways are costly and challenging to add, but PE ownership is associated with physical expansion. The researchers analyzed satellite imagery and found evidence of increased terminal capacity following PE acquisitions.

• More low-cost airlines and international routes increase passenger volumes at PE airports.

The PE owner’s goal is to upgrade the airport and sell it once its value has risen, which encourages performance improvements. By contrast, many traditional privatizations involved government-connected firms that operate as “state spin-outs.” Those ties often lead to decisions that are not profit-maximizing, such as favoring the state-owned airline over a low-cost carrier.

According to the paper, non-PE privatizations have positive results only in low-corruption countries. By contrast, PE firms are motivated by financial results, making them less prone to the rent-extracting behaviors non-PE owners might engage in high-corruption countries.

“Our evidence suggests that while government ownership is not obviously inferior to private ownership in the airport setting, the high-powered incentives and access to capital that come with investor-owned infrastructure funds add value,” the researchers highlight.