Airport Revenue Diversification (2010)

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Most non-aeronautical development programs at airports involve multiple parties, alliances, and partnerships. The subject area is vast and innovative examples exist at many airports. There is also much to learn from other transportation modes and community development projects. Recent problems in the banking industry and the economic recession have added uncertainty to many projects, extended timetables, and introduced unexpected fluidity of investors and partners. Strong airport leadership and partners, a well-defined market or customer base, and an incentive package have become a critical foundation to attract and retain developers, tenants, and airlines. This chapter will highlight some of the methods airports use to accomplish development projects. IMPORTANCE OF AIRPORT LEADERSHIP A thorough planning process described in the previous chapter will help to identify revenue diversification opportunities that make sense within the region and markets that an airport serves. However, there are also intangible attributes of the airport and community leadership that contribute to the success of a project. They include: • Airport stewardship that aligns airport interests with the long-term goals of the community. This would include airport projects that support the region’s eco- nomic goals. The project benefits may be greater to the community in terms of jobs, tax base, and spending than direct revenue to the airport. Typically, large inter- modal projects, commercial, office, and industrial parks offer economic benefits that go well beyond the airport. Military projects also fall into this category as they are high community impact, but do not always generate sub- stantial revenue for the airport per se. Utility projects such as wastewater treatment (Front Range Airport, Colorado) or mosquito control facilities (Savannah Hilton Head Airport, Georgia) also offer significant community benefits, as do aviation museums that serve as tourist destinations. Airport stewardship positions the airport within the community and region, well beyond the air- port boundaries and remains one of the most effective long-term methods to build alliances and to resolve airport–community issues. • A healthy respect for the airport’s areas of compe- tence and boundaries of that competence. Airports are governed by federal, state, and local regulations that determine what activities are permissible. However, level 20 of airport engagement in a permissible activity is typically left to airport management and sponsors. For example, some airports provide ground handling services to air- lines; others subcontract services to third parties and/or the airlines take care of ground handling on their own. Participation in airport development projects also varies widely from ground leases only; to infrastructure devel- opment; or actual construction, leasing, and manage- ment of buildings and facilities. Some airports can take entrepreneurial positions in private enterprises; others are prohibited by state or local law. Understanding the limits of airport competence, staff resources, and ability to take on risk are extremely important when an airport con- templates revenue diversification projects. • Knowledge of each party’s interest in a particular project. Project partners bring to the table shared goals and different capabilities. Airports can offer land as well as access to facilities and customers. These can be mon- etized and traded. For example, the Colorado Springs Municipal Airport has worked with its counterparts in the city’s Open Space Department to arrange a land exchange that consolidated airport parcels for develop- ment. The airport also entered into an agreement with an airport tenant that established a net present market value for a parcel of land and exchanged “the value of the ground lease” for needed access roads on the airport that the tenant in turn would construct. When capital for airport improvements is in high demand or short supply, the art of negotiation and exchange can advance a par- ticular project when airport management has a clear strategy of what is to be accomplished, its own assets, and the particular interests and objectives of involved public and private parties. • Constant networking. A recent survey of airport man- agers conducted in connection with ACRP Report 28, Marketing Guidebook (Kramer et al. 2010) found net- working to be one of the most effective (and inexpensive) ways to effectively stay in touch with business leaders, community groups, news media, public officials, airlines, tenants and prospective tenants, developers, and indus- try groups. Networking builds alliances and important relationships over time. • Attention to details and the money. Because most revenue diversification projects engage multiple parties and require share responsibilities it is important to be clear about agreement details, capital contributions, and project management responsibilities. CHAPTER FOUR LEADERSHIP, PARTNERS, ALLIANCES, AND INCENTIVES

21 • Airport staff that function effectively together. A truism, but enormously important, is that motivated air- port staff that cooperates well and functions effectively is indispensible. Good airport leadership and an effective airport organiza- tion can make all the difference in an airport’s fortunes. It is of course an advantage if the airport has access to capital and a solid market or markets to serve. However, these alone are not always enough without good leadership. ALLIANCES AND PARTNERSHIPS Today, most airport projects are accomplished by consortiums of private and public groups. Partnerships and alliances form to share resources (time, money, and people) and to accomplish tasks of common interest. Alliances and partnerships can also bring together different skill sets, complementary expe- rience, and networks, and improve the odds for a successful outcome. This section describes some of the most common airport alliances and partnerships. Shared Resources and Facilities Multi-Modal Airports are active participants in multi-modal projects that connect the airport to other modes of transport: rail, road, bus, and sea. For example, the Miami Intermodal Center (MIC) involved every mode of transportation and their respective governing agencies, the regional planning groups, and many private developers and contractors (see chapter six for more detail on this project). Other recent multi-modal projects com- pleted, under study, or in design include: • Denver International Airport—FasTracks station and airport train. • Harrisburg International Airport—Multi-modal trans- portation facility. • Port Authority of Allegheny County Airport (Pittsburgh)—Multi-modal corridor study. • San Diego Association of Governments (SANDAG)— Airport Multimodal Accessibility Plan. Equipment, Facilities, and Staff Airports also enter into partnerships or alliances to develop and/or to share use of equipment, staff, and facilities. Many of these partnerships occur at smaller airports and result in cost reductions for the airport. Typical partnerships involve joint use agreements between the airport and other branches of local government or the military. Joint use may include: • Aircraft, rescue, and fire fighting staff and equipment; • Snow plows and heavy equipment; • Air traffic control towers; and • Utilities including power, water, and sewer; renewable energy installations; and fiber optic. Infrastructure Development Development projects often require (1) rights-of-way and easements, (2) land exchanges, and (3) construction of access roads. Infrastructure development on or adjacent to airport property carried out by private developers or other govern- ment groups provides an airport with the opportunity to offer rights-of-way or easements in exchange or for revenue, to consolidate land parcels, and to extend access roads to areas of airport development. With strategic and land use plans in place, airport management can maximize these opportunities. Military Joint Use There are several instances in the United States where airports share facilities with military bases: Colorado Springs and Peterson Air Force Base, Ft. Walton Beach and Eglin Air Force Base, and Westover Air Reserve Base/Metropolitan Airport. These airports provide examples of shared air traffic control, utilities and road development, joint use of aircraft rescue and fire fighting equipment and facilities, and agreements on security and defense access. Joint use facilities can have an enormous positive impact on the infrastructure of an airport. Public Alliances Alliances evolve over time. In 1995, the cities of Chicago and Gary created the Chicago/Gary Regional Airport Authority to coordinate airport development in the region. The Authority came about because there were competing plans to redevelop Chicago O’Hare Airport and to build a new third airport at Peotone, Illinois. This joint Airport Authority is now in its fifteenth year, and the third airport possibility has long been resolved. More recently, the city of Chicago contributed $10 million to Gary to revitalize the Gary/Chicago Airport. The FAA contributed $8 million and the city of Gary $20 million. In this example, the alliance between competitors helped diffuse a prolonged (and expensive) discussion about a third Chicago airport and over time led to productive joint devel- opment efforts (Infanger 2003). Public–Private Partnerships Public–private partnerships accomplish both development projects and research. Fort Worth Alliance Airport is a city- owned public-use facility located 14 miles (23 km) north of the central business district of Fort Worth, Texas. The airport was developed in a joint venture between the city of Fort Worth, FAA, and Hillwood Development Company, a real estate development company owned by H. Ross Perot, Jr. The airport opened in December 1989. It is owned by the city of Fort Worth and managed by Alliance Air Services, a sub-

sidiary of Hillwood. Today, Alliance serves as a cargo hub for Federal Express and is a maintenance base of American Airlines. Daytona Beach International Airport is participating in a partnership between the airport, Embry–Riddle Aeronautical University, and Lockheed Martin. The Integrated Airport Project, funded through a $1.96 million FAA grant, will eval- uate new technologies to better predict airport weather condi- tions and to improve ground surface management of runways and taxiways. Daytona Beach International is the test site (Richards 2008). Marketing Alliances When it comes to marketing, alliances among stakeholders will prove invaluable. Both commercial and general aviation airports form marketing alliances with local chambers of commerce and economic development agencies. This can be an effective way to pull together a marketing program that is low cost and capable of reaching a wide audience. Partnership Roles for Commercial and Industrial Property Airports apply three basic strategies for airport development: 1. In the lowest risk strategy, the airport offers a long-term ground lease to a developer. For industrial or warehouse projects, the developer brings a “build-to-suit” subtenant, leases the land from the airport, and constructs the building. For mixed-use office and retail, the airport role is similar, but the developer may build on speculation that the space will be subleased. The airport will collect on the ground lease and usually the lease contains pro- visions to collect some percentage of gross revenues. Often, at the end of the lease, all developed property reverts to airport ownership. 2. With the highest risk approach, the airport is the devel- oper and carries the total cost of the project. The airport is also responsible for finding a tenant and managing the property. The highest risk approach offers the potential to reap the greatest returns. 3. The third strategy is a joint venture approach, where the airport and one or more partners develop a parcel. It is common in these instances that the airport will com- plete some or all of the site preparation and other part- ners will do the rest. Joint ventures require complex agreements, coordination, and oversight. Most of the large multi-use developments described in Part 3 of this document are structured as joint ventures. To gauge the complexity of a joint venture, Figure 23 shows how Dallas/Ft. Worth International Airport coordinates in- house the roles and responsibilities for a joint venture commercial development. 22 INCENTIVES Overview of Incentives The U.S. Economic Development Administration defines incentives as “. . . any inducements state and local govern- ments use to attract and retain companies and facilities.” Incentives are designed to meet a variety of business needs such as access to capital, site preparation and infrastructure, permitting and regulatory approvals, job training, and reduced start-up and operation costs. Governments have become more sophisticated and now offer incentives to achieve specific targeted objectives. Performance-based requirements have been used with air service consultants and lately with the airlines themselves. Incentive packages are usually offered to prospective air- lines or developers, although it is important that care be exer- cised to abide by FAA regulations concerning competition. The most common types of incentives are described in Table 2. Every state and local government has its own rules and regu- lations regarding what is offered, requirements, qualifications, disclosure, and enforcement. Most airports or airport authorities know what incentives are offered at the federal, state, and local levels. The creativ- ity starts with the structure of the partnership, the division of responsibilities, cost, and risk. The incentives sweeten the deal and smooth the regulatory process. Performance-based incentives quicken the pace and encourage achievement of objectives. Some airports, including Oakland International Airport, use performance-based incentives to enhance parking revenue generation. To fully cover the use and efficacy of incentives invites another synthesis or full ACRP project. However, there are interesting new additions to the palette of airline incentives discussed in the next section. Airline Incentives Airports have experience with the use of incentives to attract and keep airlines. What is changing is emphasis. Early incen- tive programs were directed at reducing the risk of market entry. Revenue guarantees and travel banks were initially attractive. It would be fair to say that at this point in time most airlines are not interested in market risk and have aban- doned unprofitable or marginal markets. Airports also have grown tired of expended revenue guarantees and subsequent service loss. With a focus on station costs, recent incentive programs target reductions in carrier operating costs at the airport. They include: • Landing fee reductions/eliminations, • Reduced rental rates,

23 Executive Office – Vision, mission, values, project coordination Planning Department – Land use planning Real Estate – Market analysis, rates and charges Risk Management – Regulatory requirements, insurance, loss control and prevention, Enterprise Risk Small and Emerging Business – Identify Disadvantaged Business Enterprise (DBE) resources and assist with implementation Legal – Counsel support and lease review Finance – Secure capital improvement financing Airport Development and Engineering – Engineering and construction services Energy and Transportation – Provide sustainability support Environmental Affairs – Environmental compliance Marketing – Joint marketing of property Asset Management – Maintenance and sustainability of infrastructure systems Public Safety – Emergency planning and response ITS - Information technologies and services Airport Operations – Protect airfield interests and operations Accounting – Payables and receivables FIGURE 23 Commercial development coordination, roles, and responsibilities at DFW. Adapted by KRAMER aerotek inc., from Brookby (2009).

24 • Provision of ground handling services, and • Facility improvements. Airports are also offering revenue sharing for expanded service and an increased number of passengers. Most of the revenue sharing comes back to the carrier as a credit to sta- tion expenses (Meehan 2005). Marketing remains a sought after incentive by the airlines, although most airlines require compliance with their advertising specifications, logos, and other marketing collateral. Incentives Description Finance Bond Debt financing instrument to finance infrastructure. Grant Direct cash subsidy from a government entity. Grants are typically for a specific project. Revenue bonds (IRBs) Tax-free bonds that are repaid from the revenue generated by the facility. Revolving loan Loan amount that can be withdrawn, repaid, and redrawn again until the arrangement expires. Tax increment financing A real estate redevelopment technique that allows a company to finance land acquisitions or improvements by borrowing money tax free (thus reducing interest rates) and lets companies purchase renovated sites or buildings at below-market costs. Tax Abatement Property tax Local government exempts company from paying some or all of the property tax over a fixed time period. Sales tax Local and state government exempts company from paying some or all of the sales tax over a fixed time period. Income/franchise tax credits State tax credits allowed when companies initiate specific types of activities (varies by state). Approval Process Fast track permits System to provide expedited review and permit decisions. Permit fee reductions Reductions in permit fees for certain types of projects. Employment Job training Offered for creation of a certain number or type of jobs associated with a new project. Payroll tax credits Local or state payroll tax credits given for initial job creation. Cost Reductions Site preparation Site preparation and/or infrastructure completed by the sponsoring entity. Fee and rental reductions Temporary reductions in landing fees or reduced rents. Pricing Selective discounting to promote use per FAA grant assurances and obligations. Utility rebates/subsidies Subsidies, credits, or rebates for utilities. Ground handling Provision of ground handling services above and/or below the wing. Facility improvements Public expenditures to improve facility for new tenant. Risk Reduction Revenue guarantees Funds set aside to guarantee that an airline receives an agreed amount of revenue for usually a new service or increased frequency of service. Airport marketing Marketing paid for by airports to increase airport awareness and passenger use of local air service. Performance-Based Credits On time Credits for on-time delivery of project. Passenger growth Credits for increases in passengers. Revenue growth Credits for increased gross revenues. Source: KRAMER aerotek inc. (2009). TABLE 2 BASIC TYPES OF INCENTIVES USED AS TOOLS TO FACILITATE DEVELOPMENT