Airport Revenue Diversification (2010)

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25 Aviation services support commercial and general aviation activity and are among the most traditional types of develop- ment found at airports. Figure 24 shows major groupings of aviation services: cargo; maintenance, repair, and overhaul (MRO); ground handling; and general aviation. From a rev- enue generating perspective, airports participate in a variety of capacities as a landlord, real estate developer, as joint partners, and as actual operators. Many small general aviation airports traditionally own some or all of the hangars at an airport and often serve as the FBO. A number of commercial service airports have taken on ground handling services. The focus of this chapter is aviation services and includes examples of airports that are providing ground handling services to airlines and that have successfully redeveloped underutilized or abandoned facilities. A list of airports con- tacted or studied is presented at the end of the synthesis. GROUND HANDLING SERVICES Overview of Ground Services Ground handling addresses the many services required when an aircraft lands and arrives at a terminal and when it departs. Airlines focus on turnaround time, so speed, accuracy, and efficiency are critical in ground handling services. Ground services involve activity in the terminal, on the ramp, and in the aircraft as follows: • Ramp services—supervision, marshalling, moving/ towing aircraft, and safety checks; • On-ramp aircraft services—fueling, wheel and tire check, ground power supply, deicing, cooling and heating, water and lavatory service, maintenance, and cleaning exterior of aircraft; • On-board services—cleaning, catering, in-flight enter- tainment, and minor servicing of cabin and seats; • Operation of ramp equipment—passenger steps or jet bridges, catering loaders, cargo and baggage loaders, tow bars, push-back tractors, forklifts, and ground power units; and • In-terminal passenger services—check-in counters, gate arrival and departure services, staffing customer service stations, and lounges. Airlines typically handle ground services themselves or they contract with a handling agent or another airline. Airports have also taken on ground handling services for a variety of reasons because: (1) an FBO exited the market and the airport stepped in to provide fuel and ground handling; (2) the airport offered ground handling as an incentive for an airline to enter or stay in the market; or (3) the airport expanded its services to include ground handling as a way to increase airport revenue. Examples of Airport-Operated Ground Services Table 3 lists examples of airports that directly offer ground services. These six airports have operated as ground service agents or FBOs for some time and are summarized briefly here. There are other commercial service airports that manage ground services through contracts with third-party vendors and many general aviation airports that fuel aircraft and function as the FBO. The AAAE in recognition that many small and medium airports provide ground services have established an affiliate organization, the Aviation Ground Services Association (AGSA). The mission statement of the organization is: . . . to protect rights and options of airport operators regarding the provision of ground service operations through the airport operator, qualified FBOs, airport/airline service companies, or through joint ventures formed by the airport operator, airlines and the ground service industry. AGSA also promotes standard- ization of ground service tasks to enhance operational efficiencies and cost-effectiveness, while enhancing customer service to the airlines and the flying public. (AAAE website: http://www.aaae. org/about_aaae/aaae committees/agsa/.) Bangor International Airport Bangor International Airport was originally Dow Air Force Base. In 1967 it was decommissioned and the city of Bangor took over the facility and began the process of converting the military facility into a public airport. Original plans did not call for the city to operate the FBO; however, in 1972 the existing FBO, TransEast Air went into bankruptcy, so the airport took over operation of the FBO. The municipality has operated the FBO since 1972 and offers a full complement of services for large commercial and general aviation aircraft. Today, a staff of approximately 50 full-time, part-time, and on-call employees is available for passenger handling, baggage loading and unloading, fueling, water and lavatory service, aircraft cleaning, coordination of catering, aircraft de-icing, CHAPTER FIVE AVIATION SERVICES

light maintenance, and flight planning. Historically, Bangor International handled many international technical stops and offered U.S. Customs service to charters, military aircraft, and diverted flights. The airport was recently selected as a diversion airport for Emirates Airlines A380 aircraft. (Bangor has an 11,440 ft runway.) 26 For more than 30 years the municipality partnered with ExxonMobil Aviation primarily for fuel, training, market- ing, and advertising. However, changes in Maine corporate tax laws resulted in an ExxonMobil decision to not operate in Maine. Bangor is now supplied by Irving Oil and Western Petroleum. Airport City/State Airport Size Management Objective Bangor International Bangor, ME Non Hub Division of Airport Replaced FBO Front Range Watkins, CO General Aviation Airport Authority Revenue Center Lehigh Valley International Allentown, PA Small Hub Airport Authority Replaced FBO Mobile Regional Mobile, AL Non Hub Airport Authority Airline Incentive/Non- Profit Quad City International Moline, IL Small Hub LLC Replaced FBO/Now Revenue Center Springfield–Branson National Springfield, MO Non Hub Division of Airport Incentive and Revenue Center Source: Compiled by KRAMER aerotek, inc. (2009). FIGURE 24 Overview of aviation services. Source: KRAMER aerotek inc. (2009). TABLE 3 EXAMPLES OF AIRPORTS OFFERING GROUND SERVICES

27 The positives for an airport-owned and operated FBO are (Kipler 2008): • Increases airport’s marketability • Strengthens relationships with airlines • Provides an alternate source of revenue for the airport • Reduces costs of entry and operations for the airlines • Offers airlines control over the level of service needed • Provides ground handling staff experienced with many different aircraft • Provides opportunities to attract international flights with Federal Inspection Services. The challenges of operating a municipal ground handling operation include: • Regulatory compliance (FAA, Customs and Border Protection, and TSA) • Environmental compliance issues (e.g., deicing and sec- ondary containment for fuel trucks) • Public health concerns (e.g., aircraft drinking water and international trash) • Fuel quality assurance • Competitive pricing • Operating expense • Union issues. Front Range Airport Front Range Airport is located approximately six miles due east of Denver International Airport. The airport opened in 1984, making it one of Colorado’s newest general aviation airports. Since its inception, the airport has owned and operated the FBO selling fuel for based aircraft (392) and visiting aircraft. In addition to fuel, the FBO offers rental service and courtesy cars, shuttles to Denver International Airport and nearby hotels, catering, the Aviator Café, flight and weather planning, crew lounge, heated hangars, and meeting rooms. Major engine and airframe repair service is available at the airport, but operated privately. Land on the 3,989 acre airport is available for private development of hangars and other industries. Lehigh Valley International Airport Lehigh Valley International Airport (Allentown, Pennsylvania), Queen City Airport (Allentown, Pennsylvania), and Braden Airpark (Easton, Pennsylvania) are all owned and operated by the Lehigh–Northampton Airport Authority. The authority also owns and operates the Lehigh Valley Aviation Services, which functions as the FBO and handles corporate and gen- eral aviation at each of the airports. At Lehigh Valley Inter- national, Aviation Services fuels commercial aircraft and also currently provides ground support for Allegiant Air, Air Tran, and Direct Air. These services are mostly ramp services and in-terminal ticketing and passenger services. There is a small amount of cabin cleaning, but no catering. Aviation Services has provided ground handling for other smaller commercial airlines in the past. Mobile Regional Airport Mobile (Alabama) Regional Airport’s Station Management Services was started in October 2001 as part of the airport authority’s strategy to retain US Airways service to Charlotte and to use ground services as an incentive to attract other air- lines. The business model is designed to lower station costs for an airline. The Mobile Airport Authority owns and operates the business, charging an airline on a per-turn (one arrival and subsequent departure) basis for equipment and staff. The original start-up costs for the airport’s ground services were funded in part by a grant from the Small Community Air Service Development Program and a contribution from the city of Mobile. The initial funding was spent to acquire ground handling and office equipment ($145,000) and an additional $312,000 funded direct operating expenses for the first year of operation (personal, supplies, and maintenance). The ground handling operations have continued. US Airways continues to serve Charlotte with three daily departures (as of September 2009) and use the airport’s Station Management Services. In April 2005, American Eagle agreed to provide two daily frequencies to Dallas/Ft. Worth using Mobile’s ground services. That service has since increased to four frequencies. Airport officials believe that savings on ground handling costs contributed to American’s start-up decision (U.S. General Accountability Office 2005). Mobile’s Station Management Services are priced to break even. The airport reports that its ground services reduce start-up costs by two-thirds and operating costs by 30%. Quad City International Airport Quad City International Airport (QCIA) (Moline, Illinois) is a small hub airport with air service to Atlanta, Orlando, Chicago O’Hare, Denver, Detroit, Memphis, and Minneapolis/ St. Paul. Air Tran, Delta, American Eagle, and United Express provide the service. The airport is operated by the Metropolitan Airport Authority of Rock Island County, Illinois, and gov- erned by a Board of Commissioners. QCIA Airport Services is a Limited Liability Corporation (LLC) that was formed to provide fueling services at the airport when the fuel vendor ceased operations in November 2003. The LLC functions as a subsidiary of the Authority. The Authority provided $600,000 for start-up costs. QCIA Airport Services (QCIA–AS) has grown organically. It began by taking over the fueling operation and purchasing two refueling trucks from the previous vendor (which it has since replaced). QCIA–AS operates the fuel farm. Air carriers purchase their own fuel and store it at the farm. QCIA–AS

charges a per-gallon fueling fee and a hook-up fee. They also maintain an inventory of fuel to sell at retail rates. Elliot Aviation, a corporate and general aviation FBO located on the other side of the airfield, has its own fuel farm as does John Deere and Lee Enterprises. By gentleman’s agreement QCIA–AS sells only to charters and air carriers. In addition, QCIA–AS provides ground handling for charter carriers. Comair staff handles ground services for United Express and Delta Connection flights. American Eagle also has its own station staff. QCIA–AS maintains a fleet of ground handling equipment to provide above- and below-wing ser- vices. Ground handling is offered on a per-turn basis, with base fees for ramp and ticket counter support and an a la carte sched- ule of services from which an airline can choose. Ground handling personnel for charters are part-time airline employees who work in coordination with their existing airline schedules. This works well to ensure that all staff are properly trained and have the requisite experience. The fuel farm is staffed by one manager, five full-time employees, and one part- time employee. In FY 2007, QCIA–AS pumped 5.4 million gallons of fuel, provided approximately 11,000 hook-ups, and had net income of $172,612 after expenses (Carter 2008). The biggest addition to Quad Cities’ ground handling operations began in May 2009. At that time, Air Tran was considering leaving the market. The Airport Authority devel- oped an incentive program to keep the airline. The largest portion of the package included QCIA–AS taking over ground handling duties for the Air Tran station. Air Tran employees were offered ground handling positions and the airport pur- chased Air Tran equipment. Today, 17 Aviation Services employees, including a manager, handle Air Tran ground operations. QCIA–AS provided services first on a 4 month pilot program and has signed an 18 month contract to continue; however, Air Tran has made no service guarantees. The rates established by the airport authority to provide ground services are on a cost recovery basis, as are other airport rates and charges such as landing fees. Cost recovery includes both operating and capital costs. Springfield–Branson National Airport In 2002, Springfield–Branson National Airport began its ground handling service, starting with charter aircraft. There were between 80 and 100 charters annually and the airport acquired surplus vehicles and equipment to provide ground handling. That same year, the airport expanded to provide boarding pass screening for all the airlines. In 2004, the airport expanded screening to a new addition of the terminal and began below the wing ground handling for Comair. In 2005, Allegiant entered the market and the airport handled above and below the wing for Allegiant. Current ground handling includes charters, four daily flights for ASA (below the wing), and 13 weekly flights for Allegiant (above and below the wing). The airport also holds the deicing contract for Delta. 28 Pricing for ground services is similar to other airports on a per-turn basis, with an array of a la carte fees to provide Air Start, a ground power unit, cabin cleaning, lavatory and potable water service, and deicing. The Springfield–Branson Airport sees the ground servicing business unit as a way to generate profit for the airport. In FY 2009, this unit generated $765,000 in operating revenue. Airport administration offered a few suggestions for success (Schroeder 2008): • Hire the best management team possible. • Start out slow . . . more opportunities will come. • Don’t buy new ground equipment, but be prepared to have mechanics on site to maintain what you buy. • Organize training programs that support growth. Each airline requires staff to go through approved FAA pro- grams. Utilize ‘Train the Trainer’ classes to train agents and new hires locally. • Keep performance levels high; good prices get contracts, but ultimately performance matters. JFK Terminal 4 Most airport-operated ground handling services take place at small- and medium-size airports. JFK Terminal 4 offers a dif- ferent paradigm. Terminal 4 is the only non-airline privately operated terminal in the country formed as a joint venture between the Port Authority of New York and New Jersey and the JFK International Air Terminal LLC, a private consortium originally combining the resources of Schiphol USA, an affil- iate of the Amsterdam Airport Schiphol; LCOR Inc., a national real estate developer; and Lehman Brothers, an investment bank. The management company oversees the entire operation while aircraft are on the ground. This includes control over what and how many ground handlers will perform operations. The goal is to offer competitive ground handling without predatory pricing. As of 2008, five ground handling companies provide services: Aircraft Service International Group; Ever- green International Aviation, Inc.; Swissport International LTD; and Triangle Aviation Services. Northwest Airlines also provided ground handling at the time (Reinhardt 2008). Observations and Further Investigation There is considerable experience both in Europe and the United States in the area of airport-owned ground handling services, common use equipment and services, and airport- managed third-party contracts. In the United States, airport- owned and operated ground services are well-established businesses at small- and medium-size commercial service airports and many general aviation airports. The examples provided in this synthesis share a few common features: • Airlines that provide limited frequency schedules are good candidates to contract out ground handling services to another airline, the airport, or a third-party vendor.

29 • Allegiant Air, Air Tran, and Direct Air appear to use other airlines or airport-operated ground services with some frequency. • US Airways, Delta Connection, and American Eagle have also used airport ground services on a limited basis. • There are a number of situations that cause an airport to begin offering ground services. The two most common involve: (1) the departure or bankruptcy of an existing FBO or (2) the airport agrees to acquire an airline’s ground handling equipment and offer employment con- tracts to airline personnel to retain the carrier’s air ser- vice at the airport. • Airport-operated ground services tend to benefit most airlines that are new to the airport and have not yet set up a station or hired employees. Cost savings also can go to the first incumbent airline if the airport purchases its ground handling equipment and facilities. Once the service is established, incumbent airlines have less potential cost savings as station equipment and staff are already in place. Because airports offer ground services for different reasons, further investigation of this topic could take into account an airport’s objectives for providing the service. Airports embrace different philosophies about pricing the services; some airports set fees to recover costs, others offer services as part of an incentive package to air carriers, and some airports operate their ground services as a revenue center. Airport accounting practice also varies. Ground services may not be tracked as a separate business unit. Sometimes ground services are integrated into various airport operations; for example, fueling, deicing, or passenger services might be tracked in different accounts. In these instances it is difficult to discern whether the airport is covering costs or making money on these services. Larger airports in the United States and Europe offer addi- tional business models to consider. The consortium at JFK Terminal 4 that subcontracts but manages all ground services provides an alternate model. Munich Airport International is also an interesting example of an airport that formed an airport subsidiary, MUC Ground Services Flughafen Munchen to provide ground services. REDEVELOPMENT OF AIRPORT FACILITIES Airline Maintenance— Consolidation and Outsourcing A wave of airline bankruptcies occurred in the first half of this decade. Among legacy carriers to file Chapter 11 were US Airways and United Airlines in 2002 and Delta Airlines and Northwest Airlines in 2005. US Airways and America West subsequently merged, as did Delta and Northwest. As part of bankruptcy proceedings and consolidation, these airlines actively shed many of their airport assets and long-term leases. The list of facility closures was long; notably, United vacated two very large maintenance facilities, one in Indianapolis and the other in Oakland. U.S. Airways closed its Pittsburgh hub and a maintenance hangar in Tampa. Northwest abandoned its Airbus maintenance facility in Duluth, Minnesota. Delta had already closed its Dallas/Ft. Worth hub, its maintenance facility, and dramatically reduced freight operations. For the affected airports, the revenue and planning impli- cations were large. For example, at Oakland International, United held a long-term lease on its 300,000 square-foot main- tenance facility built in 1971, and had substantially upgraded the building and paid the airport $330,000 per month for its lease. The long-term nature of the lease had been anticipated and built into financial projections and plans for an expanded third terminal. United gave 27 days notice that it was vacating the property. It is also not uncommon that a property in bankruptcy remains in financial limbo for some time. For example, when US Airways closed a maintenance hangar at Tampa Inter- national, there was remaining debt on the property, which had been funded by special purpose facility bonds. The Bank of New York was the trustee of the bond and had two years to find an alternate tenant. The Trustee tried to rent the property for a price that would cover debt service, but the market was soft and the property remained vacant. The Trustee received a two-year extension and tried for a total of four years to lease the property. During that time the Hillsborough Airport Authority received no rent on its land lease. After the Trustee’s interest expired, the bonds defaulted and the building reverted back to the Airport Authority. The airport invested approxi- mately $400,000 to meet safety codes and prepare the property to be leased. Six months later PEMCO MRO signed a lease that included a ground lease, a minimum facility rent, and a percent- age of gross revenues if revenues exceeded a certain target. The maintenance facility in Duluth was also the subject of a complex bankruptcy proceeding. Construction of the facil- ity for use by Northwest Airlines was financed in 1995 by $47.6 million in state of Minnesota bonds. Under the terms of the original financing agreements, Northwest Airlines had provided certain assets as collateral, securing its obligations on the bonds. Following a strike by Northwest mechanics in August 2005, Northwest closed the facility and then filed for bankruptcy the following month. A total of $35.8 million of debt service remained on the bonds. The city of Duluth, St. Louis County, and ALLETE, Inc., continued to make payments on the debt service. In July 2007, an agreement was made and approved by the U.S. Bankruptcy Court that paid the state of Minnesota an amount sufficient to fully redeem the outstanding state bonds and the amounts that the city, county, and ALLETE had also paid. The maintenance facil- ity was turned over to the Duluth Economic Development Authority debt free, which then leased the property to Cirrus Aircraft headquartered in Duluth. However, Cirrus moved out of the hangar in September 2009.

Although airline bankruptcies were the immediate cause of many distressed properties, a change in the way airlines handle their maintenance programs explains why these par- ticular facilities were jettisoned by the airlines during bank- ruptcy and why some airports have had difficulty finding replacement tenants. Three decades ago, U.S. air carriers per- formed more than 80% of their maintenance in-house; today, overall, it is less than 20%. Figure 25 shows a breakdown of dollars spent on outsourcing. Heavy MRO facilities can be remotely located. An airport actually competes for this type of facility in an international marketplace where MROs in Central America, Latin America, and Asia offer lower-cost service contracts. The MRO business is tied directly to the airline industry. Decreases in active air- craft and cancellation of aircraft orders have not only impacted the MRO industry but also original equipment manufacturers (OEMs), who are looking to replace lost revenues and focus on aftermarket opportunities. The lines between aircraft and engine manufacturers and MROs are becoming blurred because OEMs are using MROs for order fulfillment or com- peting directly with them. As long as demand from the air- lines stays the same or declines, competition from MROs and OEMs is likely to remain aggressive. It is in this context that airports holding large and vacant maintenance facilities will need to critically evaluate their relevance and prospects for redevelopment. At Oakland International Airport, there are plans to demolish the former United Maintenance hangar and redevelop the apron for cargo handling. Indianapolis Maintenance Center Similar to the situation at Oakland International Airport, United Airlines operated a large maintenance facility at Indianapolis International Airport. This was a newer facility, built in 1994, and it was also larger, in excess of 1.7 million square feet. The facility is located on 217 acres and includes hangars, machine and fabrication shops, offices, warehousing, 30 vehicle parking, a retention pond, central power plant, and aircraft apron. The hangars can accommodate both regional jets and wide-body aircraft (see Figure 26). In 2004, United bankruptcy proceedings resulted in the Indianapolis Maintenance Center (IMC) reverting to the Indianapolis Airport Authority. The Authority realized that it was unlikely to find one tenant to occupy the entire complex, so the airport devised a segmentation strategy to make the facility market attractive to multiple tenants. In 2004, the Authority leased approximately 750,000 square feet to AAR Aircraft Services, Inc., including 10 of the 12 hangar bays. The initial term of the lease is ten years, with an option to extend for an additional ten years. The Authority FIGURE 25 MRO outsourcing—2009. Source: State of MRO Industry 2009, Spafford et al., Oliver Wyman, Inc. (2009). FIGURE 26 Indianapolis Maintenance Center. Source: Indianapolis Airport Authority.

31 has six other leases related to the IMC as well as one conces- sionaire agreement. These leases are for other sections of the facility and include the remaining two hangars, the office area, and certain portions of the land. There is little space remaining at the facility that is not leased, with approximately 43,000 square feet of warehouse space still available at the time of this report (see Figure 27). As of December 31, 2008, the Authority and the Trustee continued to hold approximately $172 million of special facility revenue bonds that financed the IMC. In Chapter 11, United rejected their lease and abandoned the facility. As part of the Settlement Agreement, all rents collected for space in the IMC must be deposited in a trust on behalf of the United Airlines bondholders. However, these funds in trust are used to pay the ongoing operating and maintenance costs of the IMC including reimbursement of past capital and operating costs, payment of ground rent, and debt service. The Authority is able to offer “incentives in the form of grants and credits to assist start-up costs and the acquisition of certain capital assets. These incentives can also be used to encourage the tenant to expand operations and/or increase the amount of space they lease. All capital assets acquired with grants and credits remain the property of the Authority. At the end of 2008, the Authority has provided $6 million in grants and $3.9 million in rental credits to the lessees of the IMC” (Indianapolis Airport Authority 2008). Lessons Learned In each example presented, airports were faced with important decisions concerning what to do with abandoned maintenance bases. The large number of maintenance facilities rejected during Chapter 11 proceedings speaks volumes about changes in how airlines are implementing maintenance programs and how airports or their governing bodies need to take a hard look at the most feasible reuse of abandoned facilities. The airports discussed here applied vastly different strategies. Oakland International Airport ultimately decided that demo- lition of the UAL maintenance facility made the most sense in terms of its long-term land use objectives. Duluth Economic Development leased its maintenance facility to an important existing airport tenant for research and development, but the recession forced Cirrus Aircraft to vacate the premises. The Indianapolis Airport Authority subdivided its property, and the Hillsborough Airport Authority (Tampa) was able to refurbish and lease the US Airways maintenance hangar at favorable terms to another MRO. For assets that revert to local government or airport sponsors during bankruptcy proceedings, settlement agreements are extremely important in determining when a facility becomes available for reuse and what, if any, financial obligations for debt service are associated with the facility. Settlement agree- ments can be complex to implement. Airlines have outsourced maintenance, repair, and overhaul for about ten years. Within the industry, outsourcing is now also taking place for training and ground service programs. United Airlines is currently phasing out internal training programs in favor of outsourcing; other airlines already out- source training. Although dedicated training facilities need not be located at airports, they do represent potential excess real estate for the airlines. FIGURE 27 Schematic of the Indianapolis Maintenance Center. Source: Eliot Lees, SH&E (2005).