Guidebook for Developing and Managing Airport Contracts (2010)

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1Airline agreements have undergone significant changes in many areas in recent years. These changes are in part due to changes in Federal regulations regarding use of space and calculation of rentals and fees for use of the airport, changes in the way airlines do business, economic impacts (e.g., airline bankruptcies and hub closures) and other significant regulatory, operational and eco- nomic impacts. Trends have emerged and continue to emerge on issues driving the way airports and airlines operate and relate to each other. Airports and airlines continue to attempt to cover those emerging issues and trends in their airport/airline agreements, primarily through the major agree- ment governing the airlines’ operations at the airport, commonly referred to as the Airline Use and Lease Agreement or Signatory Airline Lease and Operating Agreement. Key airline agreement provisions are as follows: • Length of term • Control of space • Loading bridge ownership and maintenance • Ability to accommodate new entrants and growing incumbents • Affiliate definition and treatment • Treatment of alliances • Vacancy risk • Privileges granted • Defined obligations • Maintenance, repair, and janitorial • Reporting of activity • Form and amount of payment security • Insurance • Assignments and subletting • Handling agreements • Rate making • Billing, payments, and adjustments • Aviation security • MII approval for capital projects; formula for MII calculation • Bankruptcy provisions 1.1 Length of Term The strong trend in this area is for shorter term agreements. Gone are the days of the 20- or 30-year agreements that airports (and the financial markets) believed were required to support bonds used to construct terminal and airfield facilities. Airports have discovered that they can still C H A P T E R 1 Airline Agreements

sell bonds without long-term leases. The most common lease term in the industry today is 5 years. This is tied in part to the PFC requirement that leases for exclusive space can be no greater than five years. In addition, as monumental changes take place in the airline industry (e.g., bankrupt- cies, mergers, and hub closures) and the overall fluid airline economic picture, airports prefer the greater flexibility of the shorter term (in addition to other flexibilities in the agreements). Some airports have created even greater flexibility by including option terms in the agreement, either airport unilateral or by mutual agreement. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the PDX Airline Agreement for provisions regarding the extension of the agreement by mutual agreement. 1.2 Control of Space A strong trend in airline agreements is for the airport to have greater control over its facili- ties. This is driven by (1) needs and requirements to maximize use of facilities, (2) an affirmative obligation imposed by federal statute requiring airports to accommodate all carriers desiring to operate at their airports; and (3) a desire to minimize costs that result from the construction of new facilities and overall good husbandry of airport resources. To increase their control, airports are shifting from exclusive-use premises to preferential and common/joint-use premises. There are a multitude of combinations of these constructs which in turn are driven by existing and projected airline activity, current space and planned construction of additional space, historical anomalies, and the existence of a hub or heavily dominant carrier, and other airport-specific drivers. The general trend is for ticket counter and airline ticket office (ATO) space to be designated preferential space. This gives the airport flexibility in accommodating changing dynamics. How- ever, based on the particular circumstances, airports continue to lease ticket counters and ATO space on an exclusive basis. This is motivated by availability of this type of space and airline con- cerns about proprietary functions, labor agreements and security (e.g., ticket stock and check out procedures). Every airport must customize its own requirements. Gates (which include holdrooms, loading bridges, and apron parking) are most frequently leased on a preferential or common-use basis. In addition, many airports have utilization requirements related to the ability to lease a preferential gate. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the STL and BWI Airline Agreements for provisions regarding minimum gate utilization requirements. Many airports strive to have a combination of preferential-use gates (the majority of gates) and common-use gates to create flexibility to accommodate new entrants and increased flight activity by incumbent carriers. Baggage claim and tug roadway space is most commonly leased on common/joint-use basis, the notable exceptions being unit terminals or special facilities. The most frequently used formula for allocation of costs in these areas is a 20/80 formula (20% based on number of carriers and 80% based on deplaned passengers), however, many airports use a 10/90 formula. Generally, the air- ports do not have a strong preference for any one formula; the decision is frequently driven by the airlines’ preference. One issue that has been largely resolved is how to count deplaned passengers (i.e., total deplaned passengers versus deplaned destination passengers). The strong trend is for deplaned passengers to be defined as deplaned destination passengers for purposes of calculating the airlines’ rela- 2 Guidebook for Developing and Managing Airport Contracts

tive share of the 80% (or 90%). The basis of this is logic and equity—deplaning connecting pas- sengers do not use the baggage claim area. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the STL Airline Agreements for a definition of deplaned destination passenger. Outbound baggage makeup space has changed character with the advent of baggage security requirements. This space was historically more commonly designated exclusive or preferential. With the advent of TSA-mandated baggage screening, this space in many airports has converted to nonairline space used by TSA. Under current regulations, airports cannot charge the TSA for the space but can charge for electric and other utilities and janitorial costs. The same change has taken place with security checkpoints. Once commonly designated common-use airline space, the security checkpoint is now TSA space with rental costs not recoverable, but utilities and janitor- ial costs billable to the TSA. Other types of space such as ATO and operations areas are variously classified as exclusive or preferential. This determination is frequently driven by the availability of vacant space. VIP rooms are generally classified as exclusive-use space. For additional discussion of space control and accommodation, please refer to Section 1.4. 1.3 Loading Bridge Ownership and Maintenance The trend is clearly a transition to airport ownership of loading bridges. This trend ties with the correlative trend to preferential use and common-use gates. Airport ownership of the bridges enables the airport to more easily reassign space or implement accommodation and other shared-use arrangements on gates. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the STL Airline Agreement for stating the long-term policy to own all passenger loading bridges. In many airports there has been a mixed ownership of loading bridges. Many airports have a program to transition to full ownership via purchase of airline-owned bridges, airport replace- ment of airline-owned bridges whose useful life has expired, and airport purchase of bridges for newly constructed gates. Maintenance of loading bridges varies considerably among airports, even those that own the bridges. Some airports own and maintain all bridges regardless of ownership (CLT); some require the airlines to maintain both airline and airport-owned bridges (IAD and DCA, STL). In others the maintenance responsibility is determined by ownership (PDX, BWI). The maintenance responsi- bility is a negotiated term driven by each airport’s respective preference for control of maintenance standards, transfer of financial responsibility, staff availability, and other individual determinants. Even where airlines maintain the bridges, airports can include language in the airline lease agree- ment that controls the maintenance that airlines perform on bridges. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the STL Airline Agreement for provisions regarding airlines’ maintenance of loading bridges. 1.4 Ability to Accommodate New Entrants and Growing Incumbents Airports’ desire to control the use of their facilities to accommodate new entrants and growing incumbents has become a preeminent focus of airport sponsors and is a major ele- ment of airline agreement negotiations. There are virtually as many methods of accomplishing Airline Agreements 3

this goal as there are airports. However many common themes and goals can be identified in this critical area. As indicated above, most airline agreements entered into in the last 10 years have classified gate areas (including holdrooms, loading bridges, and aircraft parking apron) as preferential- or common-use space. Example airports include AUS, BWI, PDX, PHL, SEA, SLC and STL. Moreover, with the exception of PDX, all of the above listed airports also classify ticket counter as preferential-use space. PDX has a combination of exclusive-, preferential-, and common-use ticket counters with the obvious first choice for accommodation purposes being vacant or common- use space. However, PDX has detailed provisions for the accommodation of requesting carriers in exclusive- or preferential-use space if none is made available by the existing signatory carriers upon request, including the right to take back underutilized premises. Virtually all recent airline agreements contain language requiring accommodation of request- ing airlines. These accommodation provisions are generally detailed and comprehensive and are customized for each airport’s particular circumstances. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the PDX, AUS, BWI, MWAA, and STL Airline Agreements for provisions regarding accom- modation of other airlines. 1.5 Affiliate Definition and Treatment Most airline lease agreements contain definitions of airline affiliates and provisions address- ing the treatment of affiliates regarding benefits and restrictions. Affiliate definitions generally include requirements that the affiliate be operating under a code share arrangement (or IATA flight designator code) or is the parent or subsidiary of a signatory airline and is not selling seats in its own name. Most agreements require that the affiliate execute a nonsignatory operating agreement. The PDX agreement requires that the signatory carrier pay all rents due from the affiliate and file all activity reports on behalf of the affiliate. The PDX agreement also states that the affiliate’s activity will count toward the signatory carrier’s activity, revenue sharing, and MII weight. Conversely, the BWI agreement specifies that the affiliates activities and revenues are not counted for purposes of an MII. Some agreements, such as the one for STL, require the signatory to pay the affiliate’s rents and other fees if the affiliate defaults in payment. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the PDX, BWI, STL, and AUS Airline Agreements for provisions regarding definition and treatment of affiliates. Generally, the benefits accruing to an affiliate include waiver of an equal share of the 20% cost of common-use baggage areas and a waiver of a ground handling fee for handling by the signatory carrier. 1.6 Treatment of Alliances Many airport agreements do not contain any language regarding alliances. When alliances are addressed either directly or indirectly by exclusionary language, it is generally to differentiate or exclude an alliance from the definition of affiliate. This applies to what are commonly referred to as “code share alliances” such as those created by the formation of the worldwide alliances (e.g., 4 Guidebook for Developing and Managing Airport Contracts

Sky Team and Star Alliance). Some agreements contain a specific reference to the code share rela- tionship by including a definition of “Partner” to cover the method of counting the code share carrier’s operations for purposes of gate allocations. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the STL Airline Agreement for provisions regarding definition and treatment of alliance partners. 1.7 Vacancy Risk Vacancy risk is becoming of increasing importance to airports as airlines adjust space needs due to mergers and economic vagaries. Airport agreements address the risk of space vacancy in several ways. Residual agreements cover the risk of vacant space via the methodology of calcu- lating rates by netting revenues from expenses and then dividing the net by an airline-leased space denominator. Compensatory and commercial compensatory agreements generally do not recover vacancy costs because the denominator used in calculating rates is leasable space and the airport thereby bears the risk of unleased space. One way that airports can mitigate vacancy risk is to create an additional weighted space category and allocate fewer operating and maintenance expenses to that space category given that vacant space does not require as much O&M costs. 1.8 Privileges Granted Most airline agreements have lengthy and detailed descriptions of the privileges granted to the signatory. These include the right to operate its flights, repair aircraft, sell tickets, train personnel, purchase fuel, service equipment, operate radio and other communications, sell or exchange equipment and products, operate VIP clubs, handle or be handled by other airlines or entities, and prepare and distribute food and beverages (with limitations). There is normally a blanket statement preceding the specific delineation of privileges that grants the airline the right to oper- ate its air transportation business at the airport followed by a caveat that nothing be construed as granting airline the right to operate a business separate from the operation of the air transporta- tion business. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the STL, MWAA, PDX, PIT, and BWI Airline Agreements for provisions regarding the rights granted to airlines for operations at the respective airport. Most agreements exclude certain activities from airline rights and privileges. These prohibitions often include the right to • Sell food and beverages in the airport, except in VIP rooms. (The sale in VIP rooms is commonly restricted to food provided by a vendor having a contract with the airport. The same source restriction generally applies to food purchased for sale onboard aircraft.) • Install pay phones. • Install internet or wireless connectivity. (However, there is a trend toward permitting such installation in exclusive space.) • Land aircraft that exceed the design strength/capacity of the airport. • Install cash machines. • Install advertising. • Enter into any agreement with any entity providing goods and services that does not have an agreement with the airport. Airline Agreements 5

1.9 Defined Obligations Airline agreements tend to have general provisions requiring the airport to operate and maintain the airport in a first class (or other descriptive term) and businesslike manner. There is normally a correlative obligation by the airline to operate its air transportation business prudently so as not to interfere with any other user’s operations or those of the airport. In addition to these blanket state- ments, many agreements specifically delineate the airport’s and airline’s respective obligations. There is a trend away from affirmative fiscal obligations by the airport to obtain the maximum amount of federal and state grants and to maximize concession revenue and other income. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the PIT Airline Agreement for provisions regarding the obligations and responsibilities of the airport authority with respect to airport operations including operation and maintenance of facil- ities, security, maximization of concession revenues, obtaining uniform compliance by all tenants, and charges to non-signatory airlines. Also see CRP-CD-81 for excerpts from the MWAA Airline Agreement for provisions regarding the responsibilities of the airlines with respect to maintenance of facilities and supervision of personnel. 1.10 Maintenance, Repair, and Janitorial A general trend in agreements is a division of responsibilities between airports and airlines, based on the leased status of the space and the character of the space or area. Virtually all agreements require the airport to maintain the structure, roof, exterior, and utility systems up to the tenant’s dedicated lines. The airport generally is responsible for all maintenance, repair, and cleaning of public and common-use areas. There tends to be great diversity among airports regarding the maintenance, repair, and janitorial services in airline-leased areas. The greater number of agree- ments places this responsibility on the airlines in preferential- and exclusive-use space. However some airports assume all maintenance, repair, and janitorial services for all airline areas in the ter- minal and ramp and charge it to the airlines in the rates and charges. Each airport addresses this area based on its overall philosophy, historical division of responsibility, preference for control of the services, availability of staff, and financial considerations. Most agreements have a narrative in the body of the agreement that describes the services in more general terms and a support supplement in an exhibit that presents details in a matrix of maintenance, repair, janitorial, and utility responsibilities in specified areas. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the AUS, MWAA, PDX, SEA, and BWI Airline Agreements for provisions and matrices out- lining the allocation of responsibilities for maintenance of facilities and a sample RFP from AUS. 1.11 Reporting of Activity Airline agreements generally have specific provisions outlining the methods of reporting vari- ous airline activities. The requirements vary depending on the type of activity: • Projections. Most agreements require the airlines to provide a projection of landed weight for the next fiscal year in order to calculate estimated landing fees and sometimes common use charges. The time period is generally 90 to 120 days prior to the expiration of the current fiscal year. • Actual activity. Most agreements require airlines to report their variable activity, including landed weight and passenger activity within a specified period of time after the end of the pre- 6 Guidebook for Developing and Managing Airport Contracts

vious month. The time period generally varies between 5 and 15 days; however, there is a trend toward requiring the submission of reports within 5 days of the previous month’s end. Most airports require airlines to include the passenger activity of affiliates in their passenger activity reports. Most airports permit the affiliate to file their own landed weight report. This will depend on the agreement’s language regarding the treatment of affiliates (see Section 1.5). Most agreements specify the format of the reports to be submitted and provide the form as an exhibit to the agreement. The report can be submitted either as a hard copy or electronically via email. However, there is a trend in the industry, as technology expands, to require reporting air- line activity via an airport-proprietary electronic system. Many airports have or are considering new electronic systems for activity reporting. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the PDX, STL, and SEA Airline Agreements for provisions regarding activity reports and information to be provided by airlines. 1.12 Form and Amount of Payment Security Airline agreements generally take one of four approaches to the issue of payment security: • No payment security is required in the agreement. These agreements do not specifically waive the requirement, but rather are silent on the subject. This exclusion would be found in a resid- ual agreement where the airport can recover the bad debt through the rates charged to other airlines. For this reason, frequently in an airport/airline negotiation, the more financially sta- ble airlines would request a payment security provision in order to minimize their risk of pay- ing the costs of a bankrupt or defaulting airline. • An absolute payment security is required. These agreements have a requirement for payment security from the airline regardless of the airline’s payment history or good standing status. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the SEA Airline Agreement for provisions regarding the security deposit requirements. • There is a slight variation on this approach in some airports where the rate making method- ology is different in the various cost centers. For example, BWI requires payment security in compensatory cost centers only (terminal and loading bridges). See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the BWI Airline Agreement for provisions regarding performance bond requirements. • A form of payment security is required if the airline has not previously served the airport, has not served the airport for a specified period of time (ranges from 12 to 24 months) or has been late in making required payments. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the PDX, PIT, and MWAA Airline Agreements for provisions regarding security deposits to be provided by airlines. The form of payment security is generally specified as a performance or contract bond or a letter of credit, with general language allowing any other form approved by the airport. Some airports accept cash deposits but that is uncommon. The amount of the payment security is generally 3 to 4 months’ of rents, other charges, and landing fees. Some agreements require the bond amount to be updated annually or upon an increase in an airline’s fees or if the security is depleted. Many agreements do not require the air- port to escrow or pay interest on the payment security; others specifically exclude that require- ment, as also evidenced in the SEA agreement. Airline Agreements 7

1.13 Insurance Airport and airline insurance requirements are addressed in the following sections. 1.13.1 Airport Insurance A recent 2007 ACI/NA Airport Operating/Use Agreement Insurance Requirements-Bench- marking Survey (ACI Survey) revealed that only 44% of the airports that responded had airline agreements that contained language requiring the airport to carry property insurance and only 35% required airport liability insurance. Of the airports that responded that the insurance was required, most indicated that a limit was not specified. When a limit was indicated, it was gener- ally replacement value. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the MWAA Agreement for provisions regarding the authority’s insurance obligations. As demonstrated by the lack of airport insurance requirements, it appears to be generally assumed by airlines that the airports carry appropriate insurance coverage. This may change in the future, due to a perception of enhanced risk, with airlines insisting on documentation of the air- port’s coverage of the airlines’ insurable interests in the airport. 1.13.2 Airline Insurance Many older airline agreements contain language no longer used in the insurance industry. Examples of this include the terms “comprehensive general liability insurance” and “broad form property endorsement.” Airports should consult with an insurance advisor when drafting a new or amended airline agreement to make sure that both the language and coverage limits are updated. Few airports require no insurance coverage. Airports that require coverage have significantly different requirements regarding types of insurance, coverage limits, and policy requirements. Types of Insurance Most airports require airline general liability insurance that covers all ground operations and all airport premises and includes products/completed operations and personal injury. Some general airline liability requirements in the agreements also include coverage for aircraft fueling and environmental/pollution liability. Few require terrorism/war coverage. Most airline agree- ments require auto liability for both the airfield and roadways/non-airfield. Amounts of Coverage The amount of coverage required varies significantly among airports, even those of similar size. It is difficult to generalize in this area, but there appears to be a trend in larger airports in recent agreements to increase the limits for all types of insurance. For example, both SEA and STL require $500 million in airline liability insurance and $5 million in auto liability insurance. Airline Liability Insurance. The coverage requirement in this area ranges from $100 million to $500 million for major carriers and, if differentiated in the agreement, $25 million to $200 mil- lion for regional airlines. The ACI survey showed that only 4% of airports surveyed require liabil- ity insurance greater than $300 million. The ACI survey also noted that most major airlines carry liability insurance in amounts equal to $1 billion or greater. Automobile Liability Insurance. Coverage in this area is frequently differentiated between landside and airside coverage. Most airports in the ACI survey require less than $5 million in land- 8 Guidebook for Developing and Managing Airport Contracts

side coverage, but a significant number (27%) require $5 million. On the airside, most airports require between $5 and $10 million. Workers Compensation. Most airports (90%) require workers compensation coverage as required and in amounts specified by state law, with 86% requiring employer’s liability. Property Insurance. If property insurance is required the agreement generally specifies full replacement value. Policy Requirements A vast majority of airline agreements (98%) require an Insurance Certificate, but only 4% require an actual copy of the policy. Some agreements do give the airport the right to request a copy of the policy at its discretion. Ninety-six percent (96%) of agreements require the airport to be designated as an additional insured; however, only 50% require an actual policy endorsement. The standard requirement for notification of policy cancellation or change is 30 days. Airports are split on the issue of requiring the airline coverage to be primary and non- contributory with a small majority (53%) requiring this provision. Eighty percent (80%) of airports require the policy form to be an occurrence versus claims- made basis. Most agreements (62%) did not specify a penalty for failure to maintain insurance, although in most agreements this failure would be considered an event of default. A cross-liability clause is not generally specified in newer airline agreements. Sixty-one percent of airports in the ACI study did not specify a minimum financial rating for the insurance carrier for the airlines; however, there is a trend in newer agreements to specify a high financial rating. Most airports (67%) require a waiver of subrogation in the agreement and there is an increas- ing trend for this requirement. Most agreements (70%) allow a periodic review of airline insurance to ensure adequacy. Self insurance is a particularly difficult issue in airline agreements. In the ACI survey asking if self insurance is allowed, 30% of airports said yes, 33% said no, and 37% were silent. This is an area for careful consideration by the airport. The risk of self insurance is that there is no third- party insurance carrier to defend the claim as there is when the airport is “an additional insured” on the airline’s policy. There is particular cost and risk to the airport in cases where the airline contests the claim. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the BWI and STL Airline Agreements for provisions regarding insurance coverage to be provided by airlines. 1.14 Assignments and Subletting Airline agreements universally require the airline to obtain the consent of the airport spon- sor to any assignment of the lease or subletting, with most agreements making a specific excep- tion to the consent requirement for assignments to a parent or subsidiary or in the case of a merger. Most agreements state that the assignor or sublessor will remain liable for all rents and charges through the term of the agreement. A written assignment or sublease is generally required, and subleases are typically restricted to the sublessor’s actual cost plus a 15% administrative fee. Airline Agreements 9

Many agreements condition the approval and sublease on the existence or lack of various conditions: • Adequate space available for lease from the airport sponsor • A sublease of greater than 50% of sublessor’s leasehold • Assignee is not as credit worthy as the signatory airline • Assignee or sublessee is not willing to become a signatory Some agreements state that an assignment or sublease may be rejected if the signatory airline has previously failed to accommodate another carrier when requested. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the MWAA and PIT Airline Agreements for provisions regarding assignment and sublease of premises. 1.15 Handling Agreements Airline agreements generally give the airline the right to handle or be handled by other airlines or other entities. A significant number condition this right on either notice or approval by the airport sponsor and require the handled airline to have an agreement with the airport. Many airports require the handling airline to pay a fee, which ranges from 5% to 15% of gross revenues; however, some agreements exclude the handling of affiliates from the fee. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the BWI and PDX Airline Agreements for provisions regarding ground handling services by airlines. 1.16 Rate Making The rate-making methodology varies considerably from airport to airport. However, the methodology can generally be classified in the following categories: Residual (consisting of two distinct approaches to residual rate making), Compensatory, and Hybrid. • Airport System Residual Cost Center. Frequently referred to as the “single cash register approach,” this methodology adds all airport expenses and deducts all revenues to arrive at the airline rates and charges. This methodology has fallen out of favor primarily because airports want to control revenue and have flexibility on capital improvements. • Cost Center Residual. This methodology calculates all the expenses allocable to the particular cost center (e.g., terminal, ramp, and landing area) and deducts the revenues that are allocable to or sourced from that particular cost center. The net requirement is then divided by the appro- priate divisor (e.g., square feet and landed weight) to derive the rate or fee. Most airline agree- ments characterize the landing area as cost center residual, with the total allocated cost offset by non-signatory landing fees, fuel flowage fees, GA landing fees, and apron fees (if apron is con- sidered part of the landing area). Many agreements classify the terminal as cost center residual, with allocated costs offset by ancillary fees and non-airline revenues (primarily concession rev- enue) specific to the terminal. • Compensatory. Compensatory cost centers are those that calculate all expenses for the spe- cific cost center and divide that cost by the applicable divisor (e.g., square feet or landed weight). The divisor for the terminal in a compensatory methodology is generally rented space. Revenues are not deducted in this methodology to calculate rental rate or landing fee. 10 Guidebook for Developing and Managing Airport Contracts

Compensatory terminal cost centers tend to be more common in larger airports that gen- erate greater revenues. • Hybrid. This term is used loosely in the industry to describe vastly different methods of calcu- lating rates and charges. It is frequently used to describe an airport that uses different method- ologies in the separate cost centers. For example, BWI, SEA, and STL use a cost center residual methodology in the airfield and a compensatory methodology in the terminal. The term hybrid is also used to describe methods of calculating rates where the basic charges are established, either by a residual or compensatory approach, and the charges are then offset by surplus rev- enue. The amount of surplus revenue applied is determined by specific formulas in the agree- ment and varies considerably in the industry. For example, PDX (with a residual terminal cost center) has agreed to share up to $30 million in Port cost center revenues with the signatory airlines over the 5-year term of the agreement (at $6 million per year). Port cost center is defined as the cost center to which revenues and expenses associated with ground transportation, air cargo, and other aviation and non-aviation cost centers are allocated. There are restrictions on the availability of the Port revenue (e.g., required debt coverage ratios). A novel addition to the concept of revenue sharing in the PDX agreement is a reduction in the amount of the Port revenue sharing by a decrease in O&M expenses based on a specific formula. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the PDX Airline Agreement for provisions regarding the calculation of rates and charges. Many airports are moving to a controlled revenue sharing, with the formulations customized to the airport’s particular financial needs and circumstances. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the SEA and STL Airline Agreements for provisions regarding the calculation of rates and charges. Other important components of rate making are as follows: • Variable space rent. Most airports attach weighted values to different space in the terminal generally based on location and accessibility. Some airports use the weighted values to dis- courage airlines from renting excessive space of a type that is limited (i.e., ticket counter). See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the SEA and STL Airline Agreements provisions with variable rates for different classes of space. • Non-signatory premium. Most airports charge a non-signatory premium in both the airfield and terminal. The premium ranges from 10 to 25%. • Apron charges. The treatment of apron costs varies considerably. Some airports treat it as a component of the airfield and do not charge a separate fee. This approach has fallen out of favor with the emergence of low-cost carriers who tend to use their gates more heavily and, therefore, prefer a separate fee rather than loading it into the airfield, which benefits carriers with more gates and less utilization. The trend is to establish a separate cost center and charge a separate apron fee. The basis for the apron fee varies. A few airports establish a fixed fee by type of aircraft (narrowbody versus widebody) adjusted annually. Most airports establish either a per square foot or per linear foot rate with the square foot rate becoming more pre- ferred as it more accurately reflects the total square feet of the apron utilized. 1.17 Billing, Payments and Adjustments Fixed rentals (e.g., exclusive or preferential terminal rents) in most agreements are due and payable without invoice on or before the first of the month. Most airports provide a “courtesy” invoice. For variable rents and fees (common/joint-use space, other use fees and landing fees), most Airline Agreements 11

agreements require the airlines to submit an activity report for the previous month by a certain date (ranges from the 5th to the 15th day of the subsequent month), whereupon the airport submits an invoice and the airline is required to pay the invoice by “a date certain” (ranges from 10 to 30 days from the invoice date). A growing trend in airport invoicing is the concept of “self-invoicing.” Under this procedure, the airline submits its landing weight report and includes the calculation of the landing fees due based on the current rate. Payment of the fees must accompany the report. A variation on this procedure is “advance self-invoicing.” This process can be applied to land- ing fees as the airline can readily estimate the fees based on previous month’s actual flight activity and known flight schedules. Under this process, the airline estimates its landed weight for the upcoming month and self invoices based on the estimated weight, submitting a payment on the first of the month. Any discrepancy from estimated to actual is then accounted for on the next month’s self invoice. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for an excerpt from the SEA Airline Agreement for provisions relating to self-invoicing. Most agreements provide for some type of interim rate adjustment, most frequently a mid-year adjustment of rents. Some airports, projecting significant variation of activity, require an adjust- ment more frequently. Most airports also require a year-end adjustment, comparing projected with actual in all cost centers. The collection of the shortfall or payment of overcharges is handled either as a true-up or a deficit/surplus forward. In the case of a true-up, the airlines receive a bill or a check, respectively, for the variance. In the deficit/surplus forward, the deficit or surplus is rolled into the next fiscal year’s rates and fees. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the SEA, PDX, and PIT Airline Agreements for provisions regarding payment of amounts due and year-end and midyear adjustments to rates. 1.18 Aviation Security Most airline agreements have general language regarding airport security that requires the air- line to comply with all federal, state, and local regulations. Gone is the language in older agree- ments requiring the airlines to provide checkpoint and baggage security now that those have been absorbed by the TSA. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the AUS, MWAA, and PDX Airline Agreements for provisions regarding airline responsi- bility for compliance with airport security plans and TSA requirements. 1.19 MII Approval for Capital Projects; Formula for MII Calculation Airlines seek out Majority-in Interest (MII) rights of approval for airport capital projects. This has been driven by an increase in airport costs related to required capital improvements to sup- port aging infrastructure, increased aviation activity, and a lack of funding. The scope of the MII 12 Guidebook for Developing and Managing Airport Contracts

approval, the monetary thresholds, and the percentages required for airline approval vary considerably from airport to airport. One trend that has arisen, particularly in larger airports, is the pre-approved capital improve- ment program (pre-approved CIP). A significant number of airports are negotiating an inclusion of a pre-approved CIP in new agreements or extension amendments of existing agreements. These pre-approved CIPs provide a detailed description of individual projects with projected capital expenditures and funding sources. The descriptions generally contain the estimated impact of the capital projects on airline rates and charges. The pre-approved CIP is typically presented in the Use and Lease Agreement as an exhibit. The agreements generally require further airline approvals if any component project cost or the total capital cost of the pre-approved CIP varies by an established measure from the pre-approved amounts. A common measure for new airline approval is a value greater than 110% of the original cost. Some agreements permit an individual project to exceed its estimated cost if the total CIP cost does not exceed the approved amount. Many agreements provide for an annual cost escalator as part of the pre-approved CIP. It is also a trend for airline agreements with an MII requirement to include an increasingly expanded list of projects that are exempt from MII. Projects that commonly fall into this category are projects dictated by safety, security, emergency, casualty, judgments and settlements, laws and regulations, compliance with trust indenture, and noise mitigation and environmental remedia- tion. Some agreements have included an exemption from MII for capacity-enhancing terminal projects (particularly if there is an airline commitment for the space) and special facility projects if the benefiting airline agrees to pay for the project. The required formula for airline participation in the approval/disapproval process varies. Generally, there is distinction made between airfield projects and terminal projects. For airfield projects, a common requirement is for approval or disapproval by 50% of signatory airlines with 50% of landed weight. For terminal projects, many agreements specify 50% of airlines by number with some requiring 50% of rents and others requiring 50% of enplaned passengers as the threshold. Although 50/50 is common, there are myriad other formulas depending on the size of the airport, the existence of a hub carrier, the extent of the pre-approved CIP and other anomalies. Airports appear to be fairly evenly split between an approval process and a dis- approval process. Airline agreements generally contain a threshold definition for a project to be considered a cap- ital improvement. A common dollar threshold is $100,000 but can vary from $20,000 to $500,000. The useful life requirement also varies but the most common is probably 5 years. These thresh- olds generally reflect the individual airport’s overall treatment of expensed costs versus capital improvements. The value of the capital projects requiring MII approval (outside of a pre-approved CIP) vary considerably between airports, with the range from $100,000 to $10 million. The values are usu- ally higher in the airfield. The values are generally net of PFC and other funding. Airline agreements are specific and detailed on the requirements of the consultation process, particularly timing and information to be provided. See CRP-CD-81 (enclosed herein), Appendix to Chapter 1, Airline Agreements, for excerpts from the BWI, PDX, SEA, and STL Airline Agreements for provisions regarding the consultation with airlines and approval process for capital projects and for a summary of the ACI Survey of Air- line Approval for Capital Projects. Airline Agreements 13

1.20 Bankruptcy Provisions The Federal Bankruptcy Code (Code) controls the treatment of airline agreements and the respective parties’ rights and obligations. Any provision in an airline agreement inconsistent with the Code is deemed unenforceable. Because of preeminence of the Code, many new airline agree- ments do not discuss the event of bankruptcy. Some airports continue to put language in the agreements that the filing of a petition in bankruptcy is considered an event of default but the Code could prevent the airport from exercising its rights in default. 14 Guidebook for Developing and Managing Airport Contracts