Considering and Evaluating Airport Privatization (2012) / Chapter Skim
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Pages 83-103
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From page 83... ...
83 Case studies can be a useful means of illustrating first-hand experiences and lessons learned from those experiences and therefore can provide helpful background for any airport considering the various privatization models. The purpose of this chapter is to summarize the lessons learned from the case studies that were undertaken for a range of airport sizes, privatization strategies, and forms of governance.
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From page 84... ...
84 Contract Duration: Initially 10 years, but extended to December 2007 and later terminated in June 2007 Transaction Features and Highlights: • BAA was initially compensated on the basis of savings in airline payments per enplaned passenger versus a baseline cost defined in the contract • The agreement was amended to change the compensation methodology by providing for a fixed and a variable component due to the difficulty in determining the savings • The variable component was based on performance achieved towards different goals as opposed to the single goal of reduction of airline CPE • The Authority reassumed control of the airport system following the early termination of the agreement in June 2007 • BAA was not released from the requirements of Authority procurement ordinances • Once initial efficiencies had been gained by BAA, it became difficult to make ongoing improvements with effects similar in magnitude and parties started questioning the value gained by retaining BAA relative to the fixed annual fee John F Kennedy International Airport Terminal 4 Type of Transaction: Developer Financing and Operation Airport: John F
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85 Contract Execution: August 2001 Contract Duration: • Initial term began on the opening day (March 16, 2005) and lasted 5 years • Extension terms provided for 20 automatic one-year extensions unless Delta was in default • After Delta filed for bankruptcy, the "Amended and Restated Lease" term was also reduced from 25 to 10 years and Delta returned approximately one-third of its space Project Cost: 1997 project: $1,069 million (versus budget of $876 million)
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From page 86... ...
86 obligations after reconsidering the company's strategic priorities and interests in remaining in the airport industry • The transaction prohibited the sale of the lease to another party for 5 years • NEG paid $35 million in an upfront lease payment and made $10 million in capital contributions at SWF during its operation of the airport • NEG sold the lease after 7 years of operation to the Port Authority for $78.5 million, allowing it to recover its investments and realize a significant capital gain • Because the Port Authority is a public agency and not a commercial entity, the airport was no longer eligible to continue in the APPP under Port Authority control and its participation in the program was terminated Chicago Midway International Airport Type of Transaction: Long-Term Lease Inside the APPP Airport: Chicago Midway International Airport Airport Owner: City of Chicago Private Contractor: The winning bidder was Midway Investment and Development Company LLC (MIDCo) , a consortium comprised of Vancouver Airport Services Ltd.
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87 Inter national Airport by Dubai Aerospace Enterprise also in 2007 was the highest ever and an outlier) Morristown Municipal Airport Type of Transaction: Long-Term Lease/Management Contract Outside the APPP Airport: Morristown Municipal Airport (MMU)
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From page 88... ...
88 rates and charges. (In essence, the airlines were to receive $0.675 of every $1.00 of savings produced by BAA.)
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89 identify appropriate baseline adjustments in the initial years of the contract, the annual compensation calculation eventually became more of a negotiation. The negotiation became more contentious as the baseline projected in 1994 became increasingly meaningless as a result of changes in the airline industry, the economy, and new security requirements as a result of September 11.
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From page 90... ...
90 industry-accepted approaches, having a private operator involved may have streamlined and improved certain processes, especially with regard to renegotiating concession, rental car, and other nonairline contracts. 9.2 JFKIAT Terminal 4 9.2.1 Transaction Background JFK International Air Terminal LLC (JFKIAT)
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91 – Improving operational efficiency and increasing terminal capacity by replacing exclusive use arrangements with common use arrangements and new pricing approaches – Gaining PPP experience for possible deployment to other agency operations 9.2.3 Stakeholder Interests Labor. The Port Authority required JFKIAT to interview existing staff for possible employment, but JFKIAT was not contractually obligated to employ any staff.
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From page 92... ...
92 partially addressed by adding concession outlets post security and was addressed in a more comprehensive manner in the 2010 Expansion Project by consolidating and moving the security checkpoints before the main concession courtyard. JFKIAT has realized savings in operating and maintenance expenses by reducing personnel, outsourcing functions (major maintenance, janitorial and custodial, security, etc.)
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From page 93... ...
93 hand, could "walk away" if the operation in its judgment became unfeasible. Ultimately the main risk for the project rested with the bond insurer and bondholders, not JFKIAT or the Port Authority.
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94 the consent of the bond trustee and Ambac, agreed to restructure the original lease and bond trust agreement. Under the restructuring, Massport is not obligated to make the debt service payments on the Terminal A bonds.
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95 in the project understands what has been agreed upon; maintain continuous communication throughout the project; and craft a structure that aligns all parties' goals. By taking time upfront, significant time and money can be saved in the long run.84 • The lease required that Delta make annual maintenance reserve payments so that funds would be set aside for facility renovation, renewal, replacement, or reconstruction, and for unusual or extraordinary maintenance or repairs.
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From page 96... ...
96 as contracted to take over SWF operations. Moreover, the SWF transaction prohibited the sale of the lease to another party for 5 years, or until November 1, 2004.
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97 significant return on that investment and its $35 million lease payment from the sale of the remaining leasehold interest. • While there was significant economic development associated with SWF during the privatized period, the community's principal goal of improved air service was not achieved.
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From page 98... ...
98 • Establish a new framework of rates and charges that provides lower and more predictable rates for airlines operating at the Airport • Improve the competitive position, service quality, growth prospects and efficiency of Midway Airport for the benefit of Chicago residents, airlines and other users Risk Adjusted Value Optimization • Maximize sale proceeds • Ensure that future Airport development is safe, functional, efficient and delivered when necessary • Minimize the City's exposure to residual risks and liabilities from the process Fair and Transparent Process • Protect the reasonable interests of current and future airline users • Ensure fair and equitable treatment of existing Airport employees • Ensure a smooth transition from public to private management in a timely manner 9.5.3 Stakeholder Interests Airlines. Under the APPP, in order for the city to apply lease revenues from the transaction for general city purposes, the lease must receive the approval of both 65% of the airlines operating at Midway and airlines representing 65% of the annual landed weight.
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99 offer the employees positions elsewhere in city government, which may not be an option in other situations. Community.
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100 • The public sponsor needs to get key stakeholders on board early, including labor and airlines, to maximize the potential for success. • Transparency and public outreach are important.
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101 airport grants and approval of site plans, but the town is obligated to mutually cooperate with DM in securing such approvals. DM retains all revenues derived from its operation of the airport.
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102 MMU also has U.S. Customs and Border Protection services for international flights.
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From page 103... ...
103 made in a timely manner. Moreover, bureaucracy, politics, and competing funding priorities do not factor into the business decisions.
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