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Anatomy of a Lease 15
Table 1. Rate-setting models: compensatory versus residual.
Compensatory Model Residual Model
Typical Application Airports with positive cash Airports with consistent levels
flow and relatively high levels of operations and who are
of liquidity/discretionary cash willing to trade cash-on-hand
on hand or airports that to reduce the fees and charges
require subsidy from an that airlines must pay
outside agency
Party That Assumes the Airport--the airport sponsor Airline--the airport sponsor
Majority of the Financial bears the short-term financial recovers "net costs" of the
Risk risk and is more exposed to airport's operations through
financial and economic fees and charges paid by the
downturns. airlines.
Advantages (from airport The airport sponsor retains all The airlines guarantee the
sponsor's perspective) of the benefits derived from financial soundness of the
nonaeronautical revenues and airport and share in the risk of
airlines receive no direct financial and economic
benefit from this revenue downturns.
source (thereby incentivizing
the airport to pursue
nonaviation revenue). The
airlines have limited control
over capital projects, and the
airport sponsor has the ability
to maintain relatively stronger
operating and debt coverage
ratios.
Disadvantages (from The airline pays only for the Nonaeronautical revenues are
airport sponsor's facilities it uses and does not credited toward the airline's
perspective) take part in sharing all of the rate base and the airlines pay
airline-related costs of the fees and charges based on net
airport. costs after nonaeronautical
revenues are subtracted. The
airport sponsor has less
incentive to maximize
nonaeronautical revenues, and
the airport generally has less
liquidity/discretionary cash,
which can result in a weaker
balance sheet and a higher cost
of capital.
An airline may also occupy single-use airport developments that have the same lease attributes
as any other single-tenant facility. This is especially true at airports where the airline has the level
of activity and presence to support a stand-alone airport development such as a maintenance
operation or its own cargo facility.
While neither airline use agreements nor rate-setting methodologies are the subject of this
Guidebook, they both represent a component of the complex issue of airline compensation to the
airport sponsor, and correlate directly to the subject of leasing and developing airport property.
Ultimately, airline leases represent one small piece of this complex puzzle and contain many of
the same elements as any other airport lease. For a more comprehensive discussion of this subject,
the reader is encouraged to review ACRP Report 36: Airport/Airline Agreements--Practices and
Characteristics.
2.2 Essential Lease Elements
Through the case study interviews, the intangible effects of relatively good and relatively bad
agreements were revealed. It became readily apparent that agreements tend to either set the stage
for a mutually beneficial long-term business relationship that will withstand changes in staff, own-
ership, and tenant management--or set the stage for dispute. Ambiguity in the lease agreements
