Privatizing Infrastructure: Evidence from Airports

Privately owned and operated airports are prominent examples of companies running traditionally public infrastructure. As of 2020, nearly 20 percent of the world’s airports had been privatized. Private equity (PE), usually through dedicated infrastructure funds, is playing an increasing role in privatization, purchasing 102 airports out of a total of 437 that have ever been privatized.

In All Clear for Takeoff: Evidence from Airports on the Effects of Infrastructure Privatization (NBER Working Paper 30544), Sabrina T. Howell, Yeejin Jang, Hyeik Kim, and Michael S. Weisbach compare the performance of 2,444 airports in 217 countries under three types of ownership: public, PE, and non-PE private. They find that between 1996 and 2019, airports owned by PE funds improved their performance across many dimensions.

When private equity funds buy airports from governments, the number of airlines and routes served increases, operating income rises, and the customer experience improves.

A key metric of airport efficiency is passengers per flight. The more customers an airport can serve with existing runways and gates, the more services it can deliver and the more earnings it can generate. When PE funds buy government-owned airports, the number of passengers per flight rises an average 20 percent. There’s no such increase when non-PE private firms acquire an airport. Overall passenger traffic rises under both types of private ownership, but the rise at PE-owned airports, 84 percent, is four times greater than that at non-PE-owned private airports. Freight volumes and the number of flights, other measures of efficiency, show a similar pattern. Evidence from satellite image data indicates that PE owners increase terminal size and the number of gates. This capacity expansion helps enable the volume increases and points to the airport having been financially constrained under previous ownership.

After privatization, the number of airlines and routes served by airports increases. At airports acquired by non-PE private firms, there are pre-trends in these outcomes before privatization, suggesting that those airports were on track to experience improvement regardless of privatization. With regard to airlines, PE firms tend to attract new low-cost carriers to their airports, which in turn may lead to greater competition and offer consumers better service and lower prices. With regard to routes, PE acquirers increase the number of new routes, especially international routes, more than other buyers. International passengers are often the most profitable airport users, especially in developing countries.

A PE acquisition is also associated with a decline in flight cancellations and an increase in the likelihood of receiving a quality award. When an airport shifts from non-PE private to PE ownership, its odds of winning an award rise by 6 percentage points. The average chance of winning such an award is just 2 percent.

The fees that airports charge to airlines rise after airport privatizations. When the buyer is a PE firm, there is also a push to deregulate government limits on those fees. For example, after three Australian airports were privatized in the mid-1990s, the price caps governing airport revenues were replaced with a system of price monitoring that allows the government to step in if fees or revenues become excessive. 

The net effect of a PE acquisition is a rough doubling of an airport’s operating income, due mostly to higher revenues from airlines and retailers in the terminal rather than cost-cutting. The driving forces behind these improvements appear to be new management strategies, which likely includes greater compensation for managers, alongside investments in new capacity as well as better passenger services and technology.

— Laurent Belsie