Fitch: Midway Shows Challenges to U.S. Airport Privatization

NEW YORK—(BUSINESS WIRE)—The City of Chicago’s recent decision to halt the concession leasing process of Midway Airport illustrates the difficulty in gaining all parties’ agreements to execute large airport privatizations, Fitch Ratings says. Determining the value equation for both the city and for long-term equity investors is the central challenge in these transactions and, apparently, cannot be worked out for Midway. Fitch expects that smaller U.S. airport privatizations, however, are likely to continue.

Midway is one of very few commercial airports with any meaningful traffic to consider privatization. It co-serves one of the largest markets in the U.S., has an established traffic base (nearly nine million enplanements per year) and a modern infrastructure. The city had begun two different bidding processes.

Midway has significant single carrier concentration. Southwest Airlines accounts for more than 90% of its traffic. It also faces some risk of competition from nearby O’Hare and connecting traffic represents over 35% of total enplanements. Further, Midway has an elevated debt burden under the stewardship of the City of Chicago. That debt burden, as a starting point in the proposed privatization’s 40-year concession, likely limited the value that the sponsors could offer to the city in the bidding process.

It is difficult for a city to tap perceived value when an asset is already highly leveraged. Public-private partnerships may have a better chance if the asset is less levered, when future capital expenditures will not pose a significant burden to the airport’s economics and when passenger traffic is not exposed to competition from a nearby larger hub.

Fitch believes these challenges are not typical of many smaller regional airports. However, private sector participation appears to be more robust at larger airports under long-term concession structures.

Midway’s stoppage is in stark contrast to the success of privatizations in the eurozone and most recently in Brazil. While U.S. legislation for a pilot program on airport privatization is over 15 years old, the program has rarely been used, largely because the public sector has been reluctant to give up control of its airport operations.

Additional information is available on www.fitchratings.com.