Play the Angles: Like buying a boat, owning an airport may be more trouble than it's worth. Joseph Haubert

Transportation

Why We Should Sell DFW Airport

Our biggest asset—worth billions— produces only chump change for Dallas. It doesn't have to be this way.

Sean Donohue, the CEO of Dallas-Fort Worth International Airport, has increasingly found himself on the receiving end of an interesting proposal. At an aviation conference, a financier with a certain area of expertise—someone from France, say, or Mexico or Vancouver—will sidle up to Donohue and quietly ask, “Have you ever thought about selling DFW Airport?”

Donohue laughs and tries to brush off the question. But it’s no joke. Selling DFW or, rather, selling a contract to let a private company take over the airport’s operations is a viable idea. If the cities of Dallas and Fort Worth and the airport’s biggest airline, American Airlines, agreed on it, and if some group of French-Mexican-British Columbian investors could cobble together enough cash—billions of dollars—the deal could get done.

But neither Donohue nor the 12-member DFW board of directors he works for has ever been particularly interested in exploring such a deal. “I’ve never had direction from the board or the owner cities to pursue that,” Donohue says. “So we’ve just stayed on the sidelines.”

The way the board sees it, the airport is doing just fine. The fourth-largest airport in the country in terms of passenger traffic, DFW has thrived since Donohue took over in 2013. Passenger traffic is up 10 percent, and revenues are up 45 percent. Even the unsexy business of cargo has, well, taken off. Some 886,000 tons of stuff was packed into the bellies of planes at DFW last year, a 37 percent increase over 2013. If that kind of growth continues—and there’s no reason to think it won’t—DFW will be a billion-dollar business before 2023.

As it stands, DFW already tallied $841 million in total revenue in 2017, the last full year that’s been put on the books. After the airport paid its expenses—including debt service on about $6.7 billion in bonds that will fund future expansion and after a refund to the airlines that pay fees to fly in and out of DFW—the airport reported $69 million in operating income.

You might figure that the two owners, Dallas and Fort Worth, would receive dividends out of the airport’s revenues. But that’s not the case. Even though Dallas and Fort Worth paid to build the airport on a massive patch of prairie scrubland 45 years ago, they have not been allowed to receive a penny from its success. Federal law prohibits local governments from using revenues generated at airports for anything other than the development of the airports themselves.

So as DFW has gotten richer in recent years, Dallas and Fort Worth have received nothing except a small share in tax collections. That money is dispensed in different ways. Grapevine, for instance, gets the bulk of local sales taxes from airport stores and restaurants, with a $5.9 million limit. After that, Grapevine shares the tax receipts on every candy bar and t-shirt and magazine with Dallas and Fort Worth. The same is true for property taxes in Grapevine and DFW’s other so-called “host cities”—Euless, Irving, and Coppell. All four host cities collect and keep property taxes on the commercial land surrounding the airport, up to certain thresholds. After those thresholds are topped, the host cities receive one-third of the taxes collected and Dallas and Fort Worth split the remaining two-thirds. (Rental car taxes are subject to a similar split.) In Dallas’ case, all of that sharing of all those taxes totaled $7.1 million last year. For comparison, that’s less than 1 percent of DFW’s annual revenues.

But now there is an opportunity to make much more. Privatizing DFW’s operations could bring billions for the cities of Dallas and Fort Worth. We could use that money to fill potholes, maintain parks, rebuild our infrastructure, restore neighborhood connectivity, and shore up pension funds for police and firefighters.

Dallas paid to build that airport. We own more than half of it. It’s our money flying around out there. So let’s sell DFW (and, hey, let’s sell Love Field while we’re at it). Here’s how we can do it.

Step One:

Figure out where the value lies at DFW

Concrete Jungle: The runways and terminals at DFW occupy only part of the airport’s land. The rest can be developed, quite an attraction for a private operator.

Airport economics are weird. The Federal Aviation Administration mandates that all airports divide their business into two halves—one for airline revenue and one for non-airline revenue. On the airline side, the FAA mandates that airports are allowed to charge airlines only as much as it costs the airport to move their planes and passengers in and out of the airport. Last year, DFW charged airlines $386 million, exactly what the airport spent to keep planes and people moving. So that number is a wash.

The real area to focus on for revenue is what airports call, oddly, their cost center. The cost center comprises all of DFW’s concessions. That means restaurants, hotels, car rentals, ground transportation services, fees charged to corporate jet users, and so on. All of that totaled $447 million in 2017. As the airport grows, those revenues will grow. That’s true at every airport in the country. More people means more money. But DFW, unlike many other airports, has a way to grow even if passenger traffic remains flat.

DFW is big. Only Denver International Airport is bigger. DFW sits on 17,207 acres. That’s about 27 square miles of land, which airport executives like to point out is bigger than the entire island of Manhattan. Right in the middle of all that land are 11,000 acres that DFW uses for terminals, runways, hangars, and other aviation services. (DFW has five terminals, but it was designed to accommodate 13.) That leaves about 6,000 acres that can be commercially developed.

In 2005, DFW set up a commercial development office and tasked it with building out those non-aviation acres. One of the first hires was John Terrell, who would be elected mayor of neighboring Southlake in 2009. Today, Terrell’s division works with the Trammell Crow Company, Hillwood Development, and many others on dozens of different projects in the multiple business districts DFW has established. They include Founders’ Plaza, DFW Mustang Park, Bear Creek Business Park, Walnut Hill Industrial District, International Commerce Park, Southgate Plaza, and others. They’re already home to warehouses, restaurants, dozens and dozens of office buildings, a golf course, and a luxury car dealership. Specialty shops are on the way, plus a hotel, more restaurants, more offices, and a post office. The commercial development office brought in $44 million in revenue in 2017.

That doesn’t include revenue from the 112 natural gas wells also located on that commercial land. Part of the Barnett Shale natural gas deposit sits under the airport. In 2006, DFW sold the rights to tap those deposits, getting $185 million upfront, plus a 25 percent royalty on gross revenues from gas sales tied to DFW. Production fell way off after Chesapeake Energy, which bought the rights to tap gas under DFW, sold its stake in the Barnett Shale and shut down about half of the wells at DFW. Still, the airport received $2.3 million in gas royalties last year.

You know what Dallas gets from all that gas sitting under land that it co-owns with Fort Worth? You know what it gets from all of those commercial developments? Sure you do. Chump change.

Larry Casto, the former Dallas city attorney and, until recently, a candidate in the upcoming mayoral election, thinks that’s absurd. “Every time they build a building, a warehouse, or anything else at DFW, that’s basically lost revenue to Dallas and Fort Worth,” he told me late last year over a beer at CiboDivino, in Sylvan Thirty. “Someday, DFW is going to be completely developed and built out, and we’re going to wonder what we were thinking. I really don’t know if it makes sense or not to lease DFW. But we’re idiots and fools if we don’t at least take a look at it and see if it is a good opportunity.” Casto held his hands in the air and gave an exaggerated shrug. He laughed. “I don’t see what the downside would be to asking, ‘Does privatization of the airport make sense?’ ” In fact, in 2017, when Casto was still the city attorney, he prepared a lengthy report that examined that very question.

When I called Mayor Mike Rawlings early this year, he told me that he’s frustrated that neither Dallas nor Fort Worth get any significant direct revenues from DFW. “DFW is arguably the most important asset in this region,” he said. “It drives so much economic growth. But all the value there is implicit.”
 That implicit value is something you’ve likely heard about before. It’s a go-to stat from our area’s leaders. DFW, they’ll tell you, produces $37 billion in annual economic benefit for the entire North Texas region. But that benefit doesn’t build bike lanes. You can’t use implicit value to shore up a pension fund. Besides, in privatizing the airport, the implicit value remains, and whoever the investor group is that buys control of operations is betting that it grows.

Rawlings says he supports exploring the privatization of DFW, but in his eight years in office, he has done nothing to push the issue in front of the board’s 12 members. (Seven of those 12 board seats—a majority—belong to Dallas. Four belong to Fort Worth. One is given, on a rotating basis, to the cities of Coppell, Euless, Grapevine, and Irving, although their place at the table is a nonvoting one.) “We’ve not formally discussed privatization or taken a vote at the board level because there’s a lot of corners to look around to know whether this is a good idea or not,” Rawlings says. “I do want to put all options on the table. But I think Fort Worth is more cautious about this, and we haven’t talked to American Airlines about it. They’re an important partner in this decision. We want to do what’s right for them. This is a partnership we’re all in. It’s got to be a win-win-win for this to happen.”

When I spoke to Fort Worth Mayor Betsy Price, she told me something similar. She said she especially likes the camaraderie she’s established with Rawlings through the DFW board, and she likes the regional approach the joint airport has encouraged in local leaders. For that reason, she isn’t interested in privatizing DFW. She prefers the status quo. “What we can bring as a region is more impactful than what we can do separately, and the airport is a big piece of helping to build those relations and that partnership,” Price says.

There was a time when the mayors of Dallas and Fort Worth were not so kind to each other, and DFW was their point of contention.

Step Two:

Understand that federal laws have recently changed

On December 11, 1968, Dallas mayor J. Erik Jonsson donned his overcoat and a hard hat and stuck a shovel into a bit of prairie land 17 miles west of downtown Dallas and 17 miles east of downtown Fort Worth. It had taken 28 years of constant bickering between Dallas and Fort Worth to arrive at that moment.

In 1940, the federal government had ordered the cities to construct a regional airport rather than continue to put money into Dallas’ Love Field and Fort Worth’s Meacham Field. Dallas didn’t want to abandon Love and Fort Worth didn’t want to let Dallas be home to the area’s regional airport. At one point, Fort Worth Star-Telegram founder and publisher Amon G. Carter became so peeved with Dallas leaders that he swore off eating at any Dallas restaurants. If he absolutely had to be in Dallas at midday, Carter would pack his own lunch in a paper bag.

“I really don’t know if it makes sense or not to lease DFW,” says Larry Casto, former Dallas city attorney. “But we’re idiots and fools if we don’t at least take a look at it and see if it is a good opportunity.”

After city leaders in Dallas and Fort Worth buried decades of animosity in the dirt at DFW, spending an initial $5 billion in today’s dollars to get it built (with a secondary investment of $3 billion later), the federal government continued to play an outsize role in the business of moving people through the skies. Congress put strict limits on how airport revenue could be used starting in 1982, four years after the airline industry was deregulated. The idea was to keep cities from bankrupting their airports by diverting aviation fees to things like property tax cuts.

When the Republican revolution swept into Congress, lawmakers sought to undo some of those limits and encourage the development of free market forces at airports across the country. That led to the 1997 Airport Privatization Pilot Program, which allowed private owners to lease the operations of portions of an airport—a single terminal, for instance, or the whole airport. More than two decades after that program was launched, just two major airports in the United States had privatized, and only a few others had looked into the issue. A very small airport in Newburgh, New York, Stewart International, privatized, then later reverted back to public ownership. San Juan International in Puerto Rico privatized in 2012 and is still privately run. Chicago, in 2008, saw its bid to privatize Midway International Airport collapse in the wake of the financial crisis. And St. Louis recently started the process of shopping its Lambert Field on the privatization market.

That limited interest in privatization led the FAA last year to revamp and rename the program, hoping to boost privatization. It’s now called the Airport Investment Partnership Program. The program is open to every airport in the country, and it lowers several key financial hurdles for investment groups seeking to buy in to a U.S. airport.

That change in 2018 is key. That’s why financiers have been whispering into Donohue’s ear at aviation conferences. After years of tepid interest, investors sense an opening in the U.S. market for privatization.

The United States is actually way behind the rest of the world on airport privatization. In Europe, they’ve been privatizing airports since 1987, when Margaret Thatcher’s government sold off the public entity that ran major airports in the United Kingdom, including Heathrow in London. Today, privatized airports are the norm overseas. To name a few: Australia leased all of its major airports to private operators in the 1990s; most major Canadian airports are privately run; and Japan began privatizing all of its major airports in 2015. The Airports Council International, a trade group, says 51 of the 100 busiest airports in the world have at least some level of private management.

A global industry has sprung up that’s anxious to secure a foothold in the United States. “The most attractive airports to international investors right now are the ones that have a lot of growth potential,” says Robert Poole, the director of transportation policy at the Reason Foundation, a libertarian think tank. “And DFW certainly has a lot of growth potential.”

So lawmakers have created a market. But what will the market bear?

Step Three:

Put a price on DFW Airport

The going rate for many airport privatization deals around the world is a 17 times multiple of operating cash flow. In San Juan’s case, that was $616 million upfront. In addition, the group that leased the airport also agreed to pay the owner, the Puerto Rico Ports Authority, an ongoing percentage of airport revenue over the lifetime of the deal, which is 40 years. That long timeline is typical of airport privatization deals. In San Juan, the Ports Authority will receive 5 percent of annual revenue for the first 30 years, then 10 percent for the last 10 years of the lease.

Some airports have been privatized for higher multiples. Gatwick, in London, was leased by a French firm for 20 times cash flow late last year. What would DFW likely get? Think high.

“Some people would say that, for a U.S. airport, the multiple should be even more than 20 times,” says John Schmidt, an attorney with Mayer Brown in Chicago. He represented the city of Chicago in its unsuccessful attempt to privatize Midway Airport, the Puerto Rico Ports Authority in its successful attempt to privatize the airport in San Juan, and St. Louis in its effort to lease the operations at Lambert Airport. “There’s the scarcity of U.S. airports right now amid a strong global airport investment market. And if you take an airport like DFW, there are a lot of people who’d argue that it would be a trophy that’s absent in the global airport world, one that has great growth potential.”

Schmidt says the upper range of airport privatization deals is somewhere around 28 times cash flow. So let’s start with that number and multiply it by DFW’s current $350 million in “net cash from operating activities.” Here’s what we get: 28 x $350 million = $9.8 billion.

Almost $10 billion? That might not actually be enough. Consider that the Midway Airport deal, before it fell apart, was going to be $2.5 billion. DFW is almost 30 times bigger than Midway and has all that developable land. Midway’s cash flow in 2017 was $56 million. DFW’s is more than six times higher. Experts think that DFW should fetch $15 billion to $20 billion upfront. For argument’s sake, let’s stick with $15 billion. Dallas and Fort Worth would split that money, but it wouldn’t be an even split. Dallas actually owns 64 percent of the airport because, as the larger city, it chipped in more to build it.

As seemingly with anything involving federal law, there’s a financial catch to that potential windfall. If the cities agreed to privatize DFW’s operations, they would be required to pay off all of the outstanding tax-free bonds at the time the privatization occurred. As of today, that’s about $6.7 billion. So if the deal brought in $15 billion, that would net the cities $8.3 billion. Split 64–36, that’s about $5.3 billion to Dallas and $3 billion to Fort Worth.

That’s plenty of money to create a long-term fix to big problems, like Dallas’ public pension plans. That’s what Casto would do with the money. As city attorney, he helped Dallas avoid bankruptcy when its fire and police pension funds faced what could have been a $5 billion shortfall. (Note: Fort Worth has also been grappling with a $1.6 billion shortfall in its pension plan for government employees including firefighters and police.) Casto spearheaded a deal that will require members of the pension fund to contribute more to retirement and get back less when they do retire. The city, in turn, agreed to put about $40 million a year in additional money into the pension funds. That deal, Casto still feels, was not perfect.

“We did what we had to do to avoid bankruptcy,” he says. “But we knew that people down the road are still going to have to figure out the mess that was created.”

So what about the long-term revenues, like what was structured into the San Juan deal? Five percent of DFW’s current non-aviation revenues, $447 million, would yield $22.4 million. Assuming a 64–36 split, that would be $14.4 million for Dallas. As the private operator grew its business, Dallas would collect even more than that every year. There’s some complicated math that goes into that number. But without oversimplifying things too much, it’s fair to say that, under privatization, the public debt burden at the airport would be wiped out, leaving room for the private operator to charge less to airlines and passengers, and return more to the cities. To spell that out: the cities would pay off $6.7 billion in bonds with money given to them from a private operator. Then that private operator would no longer need to charge passengers for things like debt payments on the Skylink trains or Terminal D, which are covered by the current bond covenants at DFW. (If you had an exact breakdown of your next DFW fare, you’d see a $4.50 “passenger facility charge” that airlines collect to cover such expenses.)

Now, one more thing: Love Field. First, it needs to be renamed Herb Kelleher Love Field.

Second, the new FAA regulations set no limit on the number of airports that can be privatized, so there’s no reason Dallas couldn’t sell its stake in Love, too. Politically, that’s easier to do since there’s no partner city involved. Love Field’s cash flow was $21.5 million in 2017. Using that same multiple of 28 for comparison’s sake, we’re talking an upfront payment of $602 million, plus the future payments based on revenue.

Could Dallas really get that much for Love? So far, no one at City Hall has tried to find out in any meaningful way. Finding out is not free. You have to hire people to do that work—forensic accountants, for instance. Assets have to be tallied. Liabilities, too. Investors have to be surveyed. There is money available to do the analysis. The FAA, under its new rules, will give any airport that wants to study privatization $750,000 in cash to get the process started. So why don’t we take that money and get started?

There are, it must be noted, two more entities that would need to be consulted about these deals. The dominant carriers at any airport, under FAA rules, can quash a privatization deal. But there’s reason to think American Airlines at DFW and Southwest at Love would embrace the move. In San Juan, American and JetBlue were the dominant carriers before privatization, and both voted to let it proceed. At Midway, Southwest was the dominant carrier, and it vocally backed the privatization plan.

Business is business, and the private operators trying to ink a deal at those airports offered both airlines years worth of significant discounts on landing and terminal rental fees, in addition to promises of facility upgrades. “The airlines know privatization will bring them predictable rates and charges, so they’re open to the idea,” Schmidt says.

Now all we need to do is see if leaders in the city halls of both Dallas and Fort Worth are equally as open to the idea. The cities would retain ownership of the ground on which the airports sit. The sale of operations would produce billions to invest in both cities’ futures at a time when each is fairly stagnant in population growth. The “implicit value” the airports bring to the region’s economy would remain (and investors would be betting that it grows). “Everybody knows we’re talking about a significant amount of money,” Rawlings says. “There’ll be a new City Council and a new mayor coming in June. That’ll be a good time to revisit this issue, to find out if the city of Dallas and the city of Fort Worth are in the same place on this.”

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