AFA - Aerospace Forum Asia

Lion Rock Institute of Hong Kong Luncheon
6 September 2005
Dr. Eamonn Butler, Director of the Adam Smith Institute, UK
Hong Kong Club, Hong Kong
Reported by Liz Bosher

Airport Privatization Not the Perfect Answer but Better Than the Rest

Not so much a think tank as a "do" tank is how Dr. Eamonn Butler, Director and Co-founder of the British based Adam Smith Institute characterized the Institute’s mandate at the opening of his presentation to members and guests of this Lion Rock Institute of Hong Kong luncheon meeting. Dr. Butler’s subject was "Airport Privatization" with particular reference to the UK experience and the lunch attracted a strong turnout from Hong Kong’s aviation and banking sector.

The Adam Smith Institute - named after the celebrated (Scottish) eighteenth century economic thinker and author of "The Wealth of Nations" - has been an important contributor to policy making which supports an increasing role for the private sector in the ownership and management of strategic services in Britain. As a veteran of a wide range of privatization initiatives in Britain’s utilities and public transport sector Dr. Butler could speak with authority on what has gone right and what has gone wrong.

While conceding that airport privatization is not a panacea in all cases - Heathrow Airport in London being far from a model in terms of passenger service - standards in government owned and operated airports still tend to be worse. He cited a recent Oxford University study of 201 airports in which privatized airports had generally scored much higher across nine selected measures of customer satisfaction. In general terms privatization brings: higher efficiency, better amenities, more revenue and a better environment. Perhaps surprisingly, it also tends to result in lower rather than higher charges to airport users.

In Dr. Butler’s view airport privatization in some form, be it lease, management contract, trade sale or stock market offering, should now be regarded as the standard. He noted that over 200 airports worldwide are now privatized, in locations as diverse as Argentina, Mexico, UK, South Africa and Australia; many more projects are in train.

What lessons have been learned? Dr. Butler said, in his view, it was a mistake to have grouped so many airports and, in particular, all three London airports under BAA plc in the UK. Competition is the best regulator, so to the extent regulation is necessary, it should be light-handed and focused on airside charges, thereby building in an incentive to maximize profits from retail, real estate and the other potential money-spinners. Importantly, if over-regulation and excessive bureaucracy are avoided, privatization is a strong driver of reductions in costs as the airport operator is motivated to look for savings which increase profit margins without leading to higher charges to users.

All in all, Dr. Butler’s conclusion was that the Hong Kong International Airport is likely to benefit from privatization in some form. Responding to a question about how competition could be brought to bear in a one-airport town he noted that competition is driven from many quarters. In Europe and the US a whole new market had been created by the low fare carriers opting to operate out of sometimes very small secondary airports. At the end of the day competition would be market driven, by the paying passenger; private commercially operated airport businesses would be in a better position to respond to the challenges.
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Liz Bosher is the Director General of Aerospace Forum Asia and was previously Director of Planning of the HKIA. Currently she is Managing Director/Asia Pacific of Landrum & Brown.