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Business Observer Friday, May 7, 2004 14 years ago

Airport Subsidy Ignores the Invisible

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When Fred Piccolo, president of the Sarasota-Bradenton International Airport, stood before Sarasota and Manatee counties' elected officials April 26 to ask for a $500,000 taxpayer subsidy to attract a low-fare airline to the airport

Airport Subsidy Ignores the Invisible

When Fred Piccolo, president of the Sarasota-Bradenton International Airport, stood before Sarasota and Manatee counties' elected officials April 26 to ask for a $500,000 taxpayer subsidy to attract a low-fare airline to the airport, we couldn't help but think of one of the last big subsidies given to a business in this area. That was about $1 million given to Arthur Andersen.

Well, we all know what happened to Arthur Andersen.

Sure, it prospered here for a while and grew from 400 to nearly 800 employees. But the fact it is now gone and the taxpayers' subsidy basically gone with it, you can't help but be a little cynical about the airport holding out its tin cup.

Still, we listened to Piccolo make what many people - especially the elected officials - see as a good case for a short-term taxpayer bailout. Indeed, this week the Manatee County Commission was expected to follow the Sarasota County Commission, with each county pledging $250,000 of taxpayer money to the cause. Even the town of Longboat Key says it will donate $25,000.

Piccolo's case followed the tack of any good salesman. He illustrated the features and benefits of his product and tried to show how this subsidy would help solve its customers' pain. Piccolo, for instance, showed figures saying the airport generates 17,000 jobs and $377 million a year in payroll; it contributes $958.5 million a year to the regional economy once you include all of the multiplier effects of the jobs and payroll. And here's a benefit that Piccolo repeatedly emphasizes: The airport and all of its activities are a net contributor to the local tax base; they generate tax revenue for the counties. The airport does not suck up any local tax dollars (only federal dollars).

Those are the existing benefits. With the subsidy, Piccolo showed, the benefits would be even greater. If all goes as planned with the subsidy (i.e. the airport attracts a low-fare carrier and wins a $1.5 million federal grant), Piccolo's figures show that those two boosts to the airport would create 238 new jobs, provide $700,000 of entitlement funding to the airport, bring 162,500 passengers back to the airport and have a total economic impact of an additional $38 million on the local economy. Better still, it would help create a more competitive environment to attract even more airlines, which, presumably, would offer lower fares. And that, of course, would ease the pain of local travelers who frequently drive to Tampa or Fort Myers now.

Sarasota County Commissioner Shannon Staub took the bait. When the case is framed as an economic issue, Staub said, "I'm supportive of where we're headed."

Give Piccolo credit for this, too: He funneled the attendees toward buying his sales pitch when he suggested more onerous alternatives to the $500,000 subsidy. Among them: The airport would remain in a downward spiral and could become a more costly liability to taxpayers. It could petition the county commissions to levy a property tax for the airport; it could ask the Legislature for its own taxing powers; or it might ask the counties to pick up the $2.5 million annual tab for the airport's public safety functions.

And then to close the sale, Piccolo said he needed an answer now - before the May 14 grant-application deadline. Try not to give your prospective customer time to think; get him excited; get him to buy now!

Piccolo was so successful with his sale pitch that he apparently didn't prompt elected officials to think there may be still other better alternatives. There are.

But first, let's start with a few reasons why the subsidy should have been rejected:

× Subsidies are a redistribution of wealth - taking money from one and giving an unearned benefit to another. No airline has earned a revenue guarantee. What's more, if our elected officials give the subsidy, in effect, they are telling taxpayers they know more than the free market and more than individuals how best to allocate resources efficiently. Fact is, they'll never be as good, as smart or as efficient as the marketplace.

× Two: The fact the airport is asking for a subsidy at all states the obvious: that the business enterprise must not be economically viable to begin with. The obvious should be so obvious. Consider: For the past 10 years Sarasota-Bradenton International Airport has been losing passenger traffic, airlines and flights. This has occurred even after Sarasota-Bradenton International has provided airlines hundreds of thousands of dollars of fee forgiveness and other incentives. During this same period, high-volume airports such as Tampa, St. Petersburg and Southwest Florida International have been growing - primarily because of economies of scale and critical mass. Little airports, such as ours, have been shrinking. Why then should we think this decade-long trend will reverse if we offer another subsidy? Isn't the definition of insanity doing the same thing over and over and expecting different results?

Sure, we might attract Air Tran, a low-fare carrier. But what will happen when the next downturn comes? Air Tran's founders and largest stockholders don't live here; the company is not based here. It will have no capital invested in infrastructure here. When business goes bad for Air Tran, which it will some day, Air Tran will cut its least efficient and least profitable operations. Look at what Pepsico did with Tropicana: In spite of its huge capital investment and Tropicana's ancestral heritage here, it made a business decision to pull its top-paid executives and headquarters staff out of Bradenton. Air Tran, or any non-Sarasota-based airline for that matter, will have the same loyalty. Remember Arthur Andersen.

The flip side, of course, is that a low-fare carrier could in fact succeed and become profitable. But why should every taxpayer in Sarasota and Manatee counties' take that risk (however small that $500,000 may be)? Let private interests take that risk. In fact, if it's such a good idea to operate low-fare carrier here, wouldn't someone have risked his capital doing that by now?

Or, if it's such a good idea, rather than force taxpayers to subsidize a low-fare carrier, why not issue stock or bonds in an airline to private individuals and corporations in Sarasota and Manatee counties that want frequent air service to, say, Atlanta or some other hub? That would give them a vested interest in using the airline and helping it succeed - the same concept as founding a local bank. Local bank investors shift their deposits and loans to the bank in which they bought stock because they want it to succeed.

× One more reason not to grant the subsidy: A subsidy ignores the invisible. Piccolo presented what a subsidy would do. But his presentation did not offer what productive activities and benefits could result if, say, the airport were not an airport. He would never do that. His job is all about running an airport.

And to be sure, Piccolo, the airport authority members, politicians and tourist interests - in fact, most people - likely would argue that we need Sarasota-Bradenton International Airport as it is. The chorus line is this: Every great community has a viable commercial airport.

Yet, Sarasota and Manatee counties already have proven that to be false. The two counties have grown, continue to grow and will continue to grow quite well without great commercial air service.

So here's the invisible: What if all of the time, capital, manpower and real estate devoted to making the airport commercially viable were deployed toward other productive uses? We've suggested before that the airport's real estate should be sold or its land and operations privatized. Leave it up to entrepreneurs to figure out how to put the airport's land to its highest and best uses. Rather than shoulder taxpayers with keeping a dying commercial airport on subsidized life support, let private entrepreneurs turn that challenge into a money-making opportunity.

This has been done in every part of the world except the United States. Great Britain's airports were privatized years ago. Sydney, Australia's airport was sold to private operators in 2002 for $5.5 billion. The Melbourne airport went for $1.3 billion. The Indian government has privatized its five largest airports. Three companies recently bought a 65% ownership stake in the Malta International Airport. And the Chinese government permits foreign investors to own majority stakes in civil airport joint ventures.

Federal legislation allows such transactions in the United States, but as you might expect the major airlines and Federal Aviation Administration have been resisting such efforts, fearing the struggling airline industry would be required to pay the real, unsubsidized cost of using the airports. Nonetheless, this approach seems logical. To wit: Building rentals on airport property generated $5.3 million of the airport's $13.8 million in operating revenues last year. That's 34% - the largest percentage of any revenue category. The next largest category is rental car concessions, 17% of total revenues.

So consider what could happen if private enterprise maximized that real estate with other enterprises or, say, niches in the private aviation arena? If real estate rentals are generating more income at the airport than airport operations, it stands to reason similar ventures likely would generate even greater economic benefits than what exist now.

Finally, take the invisible one step further. As viable commercial airports go, Sarasota Bradenton International Airport is in a lousy location. Political leaders had the opportunity to move it out east nearly 15 years ago but blew it. That possibility still exists.

If private firms are building commercial airports in India and Ecuador, one could be built here. The logical place would be somewhere in the far eastern stretches of Manatee and Sarasota counties. In fact, if you were a tomato farmer in far east Manatee County trying to fight the influx of low-cost produce from Mexico and South America, you just might think a more productive use of your land and your neighboring tomato farmers' land could be a privately operated commercial airport.

Think not only of

SARASOTA-MANATEE AIRPORT AUTHORITY REVENUES

The following table shows the airport's operating revenues and percent of total for the fiscal year ended Sept. 30, 2003.

% of Total

Building rentals$5,290,05933.8%

Car rental concessions$2,714,80417.4

Parking lot fees$1,463,3749.4

Landing fees$1,508,0419.6

Other airfield revenue$1,257,9938.0

Other concessions$651,5744.2

Non-aviation system revenue925,7755.9

Other revenue59,5470.4

TOTAL 13,871,167

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