A Guidebook for Airport-Airline Consortiums (2014)

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82 A P P E N D I X E Feasibility Study— Illustrative Example

Feasibility Study—Illustrative Example 83 MEMORANDUM Date: April 26, 2010 To: Michael Moroney Andrea Goodpasture Peter Houghton From: Paul Demkovich cc: Jeff Crosby Bob Spielman Subject: San Antonio International Airport (SAT) Airline Consortium Study The Terminal B Development Project at San Antonio International Airport (Airport) is nearing conclusion with completion scheduled for October 2010 and first operations in November 2010. The current Terminal 2 operations will be transferred to the new Terminal B, and Terminal 2 will be decommissioned and demolished in early 2011. The Airport and Airlines have requested a study to determine the financial feasibility of using an Airline Consortium to manage, maintain and operate certain assets and functions at the Airport including airline equipment, specific portions of the terminal facilities, and airline passenger services in both Terminals A (1) and B. The airline consortium model has been successfully applied at a number of airports in the United States where a group of airlines have assumed responsibility for the operation and maintenance of equipment, systems and facilities. In each of these applications, the consortium was able to increase efficiencies, reduce costs, improve and standardize service levels. Properly applied, the airline consortium structure provides: • A layer of insurance and legal indemnification to the Airlines and Airport • The appropriate level of contract administration and management of all subcontracted services • A competitive bidding and selection of subcontracted services • The flexibility to address the changing operational needs of the Airport. The Airport and the Airlines are interested in applying the airline consortium model at the Airport with the consortium assuming responsibility for the management, maintenance and operation of designated equipment, systems and facilities…if it makes financial sense to do so. Prior to implementing an airline consortium at SAT, it is necessary to understand, document and analyze the conditions and opportunities unique to the Airport to demonstrate to all parties that the formation of an airline consortium is an appropriate and cost-effective means to manage, maintain and operate the designated equipment, systems and facilities.

84 A Guidebook for Airport-Airline Consortiums April 26, 2010 Page 2 The purpose of this report is to demonstrate the financial feasibility of an airline consortium at the Airport. To do so, the following tasks were undertaken: • Conduct interviews of airline personnel, airport staff and Concourse B project personnel • Perform site review and examine current operations • Perform site review and examine new systems in new facilities • Review airline and airport operating and maintenance budgets • Review existing operations and maintenance contracts • Document and quantify the designated airline consortium scope and desired service levels • Evaluate the designated airline consortium scope and document findings • Estimate the recommended consortium administrative and operations support staffing and budget requirements • Estimate operations and maintenance budgets for the consortium, including start- up costs • Evaluate alternatives and recommend a viable method for the capitalization of the consortium • Build a financial model to demonstrate the estimated costs of an airline consortium and, where possible, compare the results with existing efficiencies, costs and service levels • Prepare, distribute and present a report that documents the airline consortium scope, service levels and demonstrates the financial feasibility of the consortium This report summarizes findings of this research and analysis effort. The report includes the following sections: • Airline Consortium Organization and Staffing • Airline Consortium Finances • Site Review of Terminal B and Terminal 1 • Interviews with Airport and Airline Personnel • Airline Consortium Preliminary Scope of Services • Financial Feasibility and Budget Estimate • Recommendation • Next Steps

Feasibility Study—Illustrative Example 85 April 26, 2010 Page 3 Airline Consortium Organization and Staffing It is assumed for the purposes of this study that the new airline consortium will be organized as a Texas non-profit corporation to manage, maintain and operate certain Airport and Airline equipment, systems and facilities. Using this approach, it is also assumed that the new airline consortium will qualify and will be exempt from federal and state taxes. The airline consortium governance will be determined by the airlines as the consortium is being implemented and will comply with any state laws affecting such organizations. It is expected that the consortium will have a board of directors with one representative appointed by each airline member, officers and an executive committee. Other committees may be formed as necessary and as determined by the members. The actual governance structure adopted should not affect the annual operating cost of the airline consortium. It is also assumed for the purposes of this study that the new airline consortium will have no direct employees. Instead, it is assumed that the airline consortium will select independent vendors using a competitive bidding process for all necessary consortium services. It is anticipated that the airline consortium will comply with all necessary San Antonio procurement requirements including local MBE/WBE participation. It is also anticipated that the form of each service agreement will be approved in advance by the Airport, including all necessary provisions for insurance, indemnification, MBE/WBE participation and local ordinances. It is expected that each service agreement entered into by the airline consortium will include a provision for conditional assignment of the agreement to the Airport, should it become necessary. The airline consortium structure will also have the ability to procure and manage capital projects should the Airport administration determine that this is an effective means to accomplish this work. The day-to-day management of the contract oversight, financial and administrative functions will be administered by the airline consortium’s General Manager’s Office (GMO). The GMO will have two distinct areas of responsibility: Administrative and Operational Functions.

86 A Guidebook for Airport-Airline Consortiums The GMO Administrative Function will be accomplished by the General Manager, Operations Manager, Finance Manager, Finance Clerk and Administrative Assistant. They will be responsible for the following: • Administer all agreements and contracts, monitoring timely and effective performance of responsibilities there under. • Preparation of all Requests for Proposals (“RFPs”), issuing RFPs; receiving bids; tabulating bids; recommending the award of contracts; reviewing, commenting on and recommending the execution of contractor agreements for the operation and maintenance of all equipment and facilities • Monitor, oversee and advise the airline consortium in connection with all financial matters relating to invoices, payments, expenses, billings, financial agreements, record keeping, and management of accounts. • Collect operational data and calculate expense shares for all equipment and facilities. • Maintain the General Managers office and perform all supervisory and managerial functions as required by the airline consortium. • Study, analyze and recommend actions and present proposals, as required, on any issues affecting the airline consortium. • Act as liaison between the airline consortium and Airport staff, airline groups, organizations, and other persons, as necessary. April 26, 2010 Page 4 The following organizational chart outlines the GMO staffing and reporting structure:

Feasibility Study—Illustrative Example 87 April 26, 2010 Page 5 • Attend meetings, conferences and other related industry functions as required by the airline consortium. • Handle correspondence and administrative matters as required. • Interact with legal counsel, accounting/auditor personnel, and others engaged by the airline consortium. The Operational Function will be accomplished by the General Manager, Operations Manager, 4 Duty Managers, and a control room Dispatching staff. The Operations staff will provide 24/7 coverage for facility/equipment management and an onsite call center to address all operational requests. They will be responsible for the following: • Define and draft training and operating procedures for airline, TSA and contractor personnel for the operation of the equipment, including the execution of contingency procedures. • Recommend and coordinate the preparation and upkeep of a parts inventory list along with appropriate tracking and accountability requirements. Track and control equipment OEM warranty process. • Assist in the preparation and review of all maintenance-related contracts and oversee and evaluate all maintenance-related contractual performance. • Review daily service and equipment report logs and assist with all maintenance- related issues. • Oversee and monitor the equipment operational performance for all equipment and support services. • Coordinate with airlines, TSA, vendors and contractors, as required, to ensure that each airline receives the desired level of service. • Specify, evaluate, recommend and/or administer policies, practices and programs necessary to ensure a safe and efficient operating environment. • Maintain quality control standards for performance, reliability, serviceability and safety. • Prepare and distribute quarterly/monthly/weekly/daily management reports. It is planned that the GMO will utilize a Computerized Maintenance Management System (CMMS) which will allow for efficient use of resources. The CMMS will track labor allocation to specific equipment, produce preventive maintenance work orders and track for completion, and maintain stock inventory to ensure the appropriate levels of spare parts and materials. Our experience is that other airline consortiums have successfully utilized CMMS software provided by Datastream/MP2, which is purchased off-the-shelf and tailored to each application.

88 A Guidebook for Airport-Airline Consortiums April 26, 2010 Page 6 Airline Consortium Finances It is anticipated that the airline consortium will prepare an annual budget that will be submitted to the Airport for inclusion in Airport rates and charges. The Airport will collect terminal rentals, equipment and passenger processing fees from the airlines and provide the necessary funding to the airline consortium. Each month, the airline consortium will submit an invoice to the Airport containing an estimate of operating and maintenance costs for the upcoming month, excluding passenger processing services costs, if any. The Airport will pay this estimated amount to the airline consortium, which will then be responsible for direct payments to its vendors after actual costs are incurred. The airline consortium will reconcile the monthly payment received from the Airport for estimated costs to actual costs incurred, after the close of each month, and will provide the reconciliation to the Airport. Additionally, the airline consortium will prepare its own internal budget for passenger processing services including skycaps, wheelchairs, ticket verification agents, etc., if applicable. The airline consortium membership will determine an appropriate cost allocation methodology for any such services provided by the airline consortium. The airline consortium will then invoice any user for services provided, receive payment directly from these users and pay its vendors on a monthly basis. As a result of these processes, it is anticipated that the airline consortium will need very little direct capitalization and membership fees can be minimal. It is planned that the airline consortium will provide full financial transparency to the Airport and Airlines, including budget preparation, administration, and documentation of contracts and invoices, supported by an annual year-end audit of revenues and expenses by an independent third-party accounting firm.

Feasibility Study—Illustrative Example 89 April 26, 2010 Page 7 The following diagram illustrates the anticipated flow of funds if the airline consortium model is implemented as described above: The impacts to the financial analysis included with this report as a result of the assumptions stated above in the Airline Consortium Organization, Staffing and Finances sections above may be summarized as: • Texas non-profit corporation – No tax expenses included in analysis • No airline consortium employees – No employee expenses included in analysis • Independent Vendors provide all services – Estimated costs of service providers under contracts with the airline consortium included in analysis • Funding – Airport rates and charges provide primary funding, therefore: o Capitalization – No capitalization costs included in the analysis o Membership Fees – Minimal membership fees required

90 A Guidebook for Airport-Airline Consortiums April 26, 2010 Page 8 Site Review of Terminal B and Terminal 1 AvAirPros made two field visits to the Airport to collect data and produced detailed site meeting notes at the conclusion of each visit. The field visits, which are summarized below, served to define the preliminary scope for the new airline consortium. The detailed site meeting notes from both site visits are included as attachments. On the morning of Tuesday March 23, 2010, AvAirPros personnel Mr. Jeff Crosby and Mr. Bob Spielman met with Terminal B Project Managers Ms. Julie Kenfield and Mr. Bob Cotton. Ms. Kenfield provided a full construction status overview and a tour of the Terminal B Project. The overview included a review of plans for the Operations Premises, Arrivals Level, Departures Level and Bridge/Mechanical areas. Terminal B will be a 245,331 sq ft facility that will provide more efficient operations to the airport, airlines and the travelling public. The Terminal B facility will consist of 8 gates, with 6 gates available on the Date of Beneficial Occupancy (DBO). Gate B 3 will be available 6 months after terminal opening, and Gate B1 after the completion of Terminal 2 demolition. Mr. Cotton provided a full overview and tour of the new Terminal B Baggage Handling System including a review of the system layout and initial phasing plan. The Inline Explosive Detection System (IEDS) Project was procured under a design/build contract with Vanderlande Industries to manufacture and install a new conveyor system to efficiently process passenger baggage in accordance with TSA protocols. The IEDS includes 5 L3 Examiner 6300 units to screen baggage, a Checked Bag Resolution Area (CBRA), an OnScreen Resolution (OSR) room, and an Operations Control Room. The CBRA and OSR rooms will be staffed by TSA personnel to clear any suspect bags, and the Control Room will be staffed by airline consortium personnel to monitor system functionality. Each L3 unit is manufactured to process 490 bags per hour, equating to a system processing capability of 2,450 bags per hour, which provides almost 20% additional capacity for future growth. System testing will occur in June and July of 2010, and the system will be fully commissioned for the opening of Terminal B. Mr. Crosby and Mr. Spielman also met with Mr. Jorge Perez of the City of San Antonio and Central Utility Plant (CUP) Project Manager Mr. Pat Patton. Mr. Perez and Mr. Patton provided a facility tour and overview of the CUP. The CUP is equipped with three 1,400 ton chillers that provide cooling supply to Terminal B, Terminal 1 and the FAA complex. A 4th chiller is planned to provide for future cooling needs. Heating is supplied by boilers in Terminal 1, and will be supplied by boilers in Terminal B. The CUP facility has been fully tested and is scheduled to open within 30 days. The original equipment manufacturer has provided training and suggested preventive maintenance schedules.

Feasibility Study—Illustrative Example 91 April 26, 2010 Page 9 On the afternoon of March 23, 2010, Mr. Crosby and Mr. Spielman met with Airport Managers Mr. Dan Gallagher and Mr. Randy Gray. Mr. Gallagher and Mr. Gray provided a tour of Terminal 1, outlining current operations, equipment and systems. The temporary baggage handling system, which is currently maintained by Vanderlande Industries under a time and materials contract, was also toured. The contract is effective through December 2010, with a month-to-month option thereafter, and includes the 2 flat plate claim devices in the Federal Inspection Services (FIS) facility. The Airport owns a $50,000 spare parts inventory for these systems. Terminal 1 has 16 gates equipped with older model passenger loading bridges from various manufacturers. A project is currently under consideration to replace all Terminal 1 passenger loading bridges with new equipment from the manufacturer of the Terminal B bridges, since this would provide for more efficient maintenance and spare parts management. Custodial and maintenance issues related to public space, airline holdrooms, airline operations space, and concessions areas were also discussed. Interviews with Airport and Airline Personnel On the morning of Wednesday March 24, 2010, Mr. Crosby and Mr. Spielman met with Airport Vice President Michael Moroney and Director Eric Kaalund in the Airport Administrative offices in Terminal 1. During this meeting, Mr. Crosby and Mr. Spielman summarized the previous day’s activities and findings. The main focus of the discussion was scope review and clarification for the proposed airline consortium. Mr. Moroney suggested that in addition to the airline equipment and passenger services, the study should include the review of airline consortium management for all aspects of facility maintenance for Terminal B, Terminal 1 and the CUP: mechanical, electrical, plumbing, painting, custodial, trash removal, elevator/escalator, and automatic doors. The purpose of the increased scope review was to achieve operational and financial efficiencies. Mr. Moroney indicated that a 24/7 management and maintenance presence is essential in achieving these efficiencies. This can be accomplished through a central dispatch center utilizing a Computerized Maintenance Management System (CMMS) which will receive and track work requests, prepare preventive maintenance work orders, maintain appropriate inventory levels, and produce management reports necessary to ensure that superior service levels are achieved and maintained. The City of San Antonio currently uses SAP software as its CMMS, but discussions are ongoing related to changing to a Maximo system. Mr. Crosby stated that an off-the-shelf MP2/DataStream software system has proven successful in other airport applications.

92 A Guidebook for Airport-Airline Consortiums April 26, 2010 Page 10 Mr. Moroney also outlined various areas to improve Airport and Airline operations and passenger experience: • Dockmaster Operation to review the logistics of efficient concession deliveries • Jet Fuel Storage Tank review based on capacity issues of the current 2 tank system • Hydrant Fueling System review because current activity levels might support the financial feasibility of system installation • Terminal 1 Passenger Loading Bridge Replacement Project • Terminal 1 Facility Upgrade Project including lights, toilets, HVAC system, elevator/escalator rehab, and painting • Consolidated Wheelchair Services to provide consistent passenger service from a single vendor, rather than the current split operations • Passenger Assistance Agents at the Checkpoint during peak time periods Mr. Moroney requested that the Aviation department’s Attorney join the discussion to outline the legal procurement requirements. Assistant City Attorney Griselda Sanchez joined the meeting and provided an overview on public bidding and MBE/WBE/Local Participation requirements. Ms. Sanchez stated she would provide Airport/City insurance and indemnification, current MBE/WBE, and full procurement procedure requirements. Possible consortium funding mechanisms, rate and charges calculations, consortium invoicing and airline payment processing were also discussed. The meeting concluded with the understanding that all information, document requests and meeting scheduling would be coordinated through Mr. Kaalund as point of contact. On Wednesday April 14 and Thursday April 15, 2010, Mr. Crosby and Mr. Spielman conducted a second site visit to secure the balance of the required data. They met with the following individuals: Eric Kaalund, Dan Gallagher, Kimberley Coleman, Bob Cotton, Dan Delgado, and Ryan Rocha. With the assistance of the airport staff, a good deal of additional information was gathered, including hard copies and electronic versions of various drawings and documents, as well as verbal answers to nearly all outstanding questions. An airline meeting is scheduled for May 4, 2010 to present the consortium feasibility report and receive the necessary wheelchair information regarding historical passenger assist activity from the current service providers.

Feasibility Study—Illustrative Example 93 April 26, 2010 Page 11 Airline Consortium Preliminary Scope of Services The following preliminary airline consortium scope of services has been identified based on discussions and meetings with the Airport and the Airlines:

94 A Guidebook for Airport-Airline Consortiums April 26, 2010 Page 12 The following is a description of consortium operations and maintenance contracts and other major components of an estimated budget for the first operating year of a new airline consortium at the Airport. Included with each description is a brief synopsis of the scope of work of that contract.

Feasibility Study—Illustrative Example 95 April 26, 2010 Page 13 General Managers Office (GMO) - The GMO is the consortium’s administration and operations staff at the Airport. The GMO will be responsible for enforcing the policies as set forth by the Consortium and its Agreements. The GMO acts as the interface between the Airlines and the Airport for all operations and maintenance activities performed by the consortium. Because the GMO prepares all service vendor RFPs and implements the operational and financial policies and procedures of the consortium, it is important that this function be established as early as possible. Airline Systems – The airline equipment operation and maintenance vendor will be responsible for the Inline Explosive Detection (IEDS) baggage handling system, all inbound and outbound baggage handling systems, including the FIS Facility. The scope of this contract will include the Passenger Loading Bridges, Preconditioned Air, Ground Power, Potable Water and Triturator systems. As part of their preopening activities, the airline equipment operation and maintenance vendor will procure spare parts needed for maintenance of the BHS, passenger boarding bridges, preconditioned air system, ground power system, and potable water cabinets. Janitorial - The janitorial vendor will be responsible for the public spaces of the Terminal facilities. These areas include landside, airside terminal, public restrooms, SAT offices and holdrooms. The budget includes all supplies, and window washing services. Central Utility Plant/HVAC – The CUP/HVAC operation and maintenance vendor will provide all management, personnel, tools, equipment and spare parts to operate and maintain the CUP facility and HVAC systems in the terminal facility. Building Maintenance - The building maintenance vendor will be responsible for all facility equipment and systems. These areas include airline operations spaces, restrooms, and other public operational areas of the terminal. The scope includes mechanical, electrical, plumbing, carpentry and painting services. As part of their preopening activities, the building maintenance vendor will procure spare parts and special tools needed for performance of their duties. Conveying Systems - The conveying system vendor will be responsible for maintenance of all elevators and escalators located in the Terminal facility and parking garage. This includes preventive and reactive maintenance, tools, equipment and spare parts. Ramp Striping - The ramp striping contractor will be responsible for restriping aircraft safety envelopes, GSE equipment areas and bagroom on an annual basis.

96 A Guidebook for Airport-Airline Consortiums April 26, 2010 Page 14 Waste Removal - The waste removal vendor will be responsible for providing and emptying dumpsters and trash compactors within the Terminal facility. Pest Control - The pest control vendor will be responsible for monthly treatments required in the Terminal facility. Fire/Life Safety Systems – The vendor will provide testing and inspection of fire system, sprinkler system and fire extinguishers throughout the facility. Automatic Doors – The vendor will provide monthly preventive maintenance, and reactive maintenance on an on-call basis. This contract will include all tools, equipment, parts and materials to service the automatic doors throughout the facility. Dockmaster/Delivery Logistics – Additional information and scope definition is necessary for this responsibility. As a result, no cost estimate for this scope has been included in the analysis. Contingency - A contingency amount equal to 10% of the estimated operation and maintenance services has been included in the analysis for unforeseen needs. Utilities - Additional information and scope definition is necessary for this responsibility. As a result, no cost estimate for this scope has been included in the analysis. Insurance - The consortium will secure general liability insurance covering all aspects of the facility and equipment in its scope of services. Leased Premises – The leased area for the airline consortium has been identified to include administrative, operations, locker room, maintenance shop, and parts storage space at the anticipated rental rate of $117.49/sf/year. Wheelchair Services - This vendor will provide personnel to push disabled passengers in wheelchairs in accordance with ADA standards. Vendor will provide uniforms and radios. Consortium will purchase wheelchair inventory. Oversize Transport/Tub Runners - This vendor will provide personnel to move oversize baggage for TSA screening, deliver to airline bag makeup device, and place tubs at ticket counter for efficient use of the baggage handling system. Passenger Assistants/Line Queuing - This vendor will provide personnel to assist in line queuing/escorting at security checkpoint during peak periods. Capital Acquisitions – This scope includes the proposed capital acquisition of spare parts, tools, equipment, and service vehicles.

Feasibility Study—Illustrative Example 97 April 26, 2010 Page 15 Financial Feasibility and Budget Estimate Based upon the assumptions described earlier in this report, site visits, data collected, interviews with airport personnel, and AvAirPros’ industry knowledge, we have analyzed the airline consortium proposed scope requirements and prepared an Estimated Airline Consortium Annual Operations and Maintenance Costs including passenger processing services and first year capital acquisitions. A summary of this estimate is presented on the next page and Attachment 1 provides additional detail. The Total Annual O&M estimate includes all labor, material, supplies, tools and equipment to provide the services described in the Airline Consortium Preliminary Scope of Services for a full year. Staffing levels are based on aviation industry standards for terminal facility operations found in other airports. Wages are based on current economic and employment conditions in the San Antonio metropolitan area. The Capital Acquisition estimate is based on estimated requirements for attic stock levels, spare parts, tools, equipment, and service vehicles necessary to support the consortium operation. This estimate assumes that current equipment, tools and attic stock owned by the airport is not available for use by the airline consortium. The estimate can be reduced if the airport’s current inventory of parts, supplies and equipment were made available to the consortium operation. The inventory would need to be evaluated for appropriate levels of stock inventory, and the availability of useful existing janitorial and maintenance equipment. Some areas of the estimate which require further refinement include the airline consortium leased premises rental payments, utility payments, general liability insurance requirements and payments, and dockmaster/delivery logistics operation. Also, a meeting is scheduled with the SAT Airlines on May 4 to further discuss all aspects of passenger processing service levels, and review the proposed consortium organization, scope of services, and budget. The results of that meeting may impact the estimates presented below.

98 A Guidebook for Airport-Airline Consortiums April 26, 2010 Page 16 These estimated costs were prepared based on the assumptions previously stated and will appropriate staffing and service levels to meet the Airport and Airline high service level expectations.

Feasibility Study—Illustrative Example 99 April 26, 2010 Page 17 Recommendation The report and analysis presented above were prepared based on a number of assumptions. It is recommended that these assumptions be evaluated for accuracy and that the report and analysis be adjusted if assumptions revisions are made. Also, it is recommended that the airline consortium preliminary scope of services presented herein be evaluated for reasonableness and acceptance by the Airport and Airlines to ensure that all parties are in agreement with the scope that has been identified for the new airline consortium. Additionally, it is recommended that the estimates presented herein be compared to Airport budget estimates for similar scope for the 12-month period that will begin with the opening of the new Terminal B to determine if a consensus can be reached on the feasibility of the application at the Airport of the airline consortium model as defined. Next Steps If it is determined that the airline consortium model is feasible and should be implemented at the Airport, the following next steps are recommended: • Prepare a draft Consortium Agreement to document the agreement between the airline consortium and the Airport for the operations and maintenance of the airline consortium equipment, systems and facilities • Prepare a draft Airline Consortium Members Agreement to document the agreement among the consortium member airlines related to the administration, management and operation of the consortium • Prepare a draft Facility Access Agreement to document the rules that will apply to non-members of the airline consortium who desire access to and the use of the equipment, systems and facilities operated and maintained by the airline consortium • Circulate the draft agreements for review, incorporate comments, and finalize • Secure outside counsel and coordinate a due diligence review of the draft agreements • Create the airline consortium and register it with the necessary governmental entities Because the new Terminal B facilities are scheduled for first operations in November, time is of the essence if a new airline consortium is to be implemented. To meet this schedule requirement, the new airline consortium will need its primary vendors contracted and mobilized by approximately September 1.

100 A Guidebook for Airport-Airline Consortiums Corporate Office 5551 Ridgewood Drive, Suite 401 Naples, FL 34108 Tel 239.262.0010 Fax 239.262.8808 To: SAT Airline Affairs Committee From: Jeffrey J. Crosby Staff Vice President Date: October 13, 2010 Subject: San Antonio Airline Consortium Business Structure Review As part of the ongoing discussions regarding the formation of an airline consortium to operate and maintain certain equipment and provide certain services at San Antonio International Airport (SAT), it is necessary to review and select one of the business structure options available for operations in the State of Texas. The business structure of the airline consortium needs to have the formal means to approve and implement long- term strategy, while remaining flexible to address day-to-day operations. The selected business structure must provide liability protection to its members. Additionally, each available structure has federal and state tax implications which also must be considered. The intent of the airline consortium is to operate and maintain certain equipment and provide certain services. As such, the consortium should not own significant assets or generate profits (other than interest income). This memorandum has been prepared to outline the options, provide a recommended business structure, and review the steps necessary to establish this business entity in the State of Texas. It must be noted that AvAirPros is not an accounting or tax firm and is not qualified to provide tax advice. However, the following information is based on our research and is offered for your consideration. Business Structure Possible business structures available in Texas to the San Antonio Airline Consortium include: • General Partnership • Limited Liability Partnership • Limited Partnership • Limited Liability Company • “C” Corporation • “S” Corporation • Nonprofit Corporation

Feasibility Study—Illustrative Example 101 October 13, 2010 Page 2 To operate in Texas, a business entity must file a certificate of formation with the Texas Secretary of State’s office. The Texas Secretary of State has published the Texas Business Organizations Code (BOC), which codifies the requirements for entities operating in Texas. The BOC applies to all new Texas corporations, partnerships, limited liability companies and other domestic filing entities created January 1, 2006 or later. Additionally, the following Texas statues are applicable to the airline consortium structure research, and have been utilized in this study: • Texas Business Corporation Act • Texas Nonprofit Corporation Act • Texas Limited Liability Company Act Based upon the BOC and these Acts, we have outlined the description, characteristics and recommendation for each business structure option. Limited Liability Partnership, Limited Partnership and “S” Corporation - The Limited Liability Partnership, Limited Partnership and “S” Corporation structures are “pass-through” entities that require income tax liability be passed on to their owners. Therefore, no further consideration will be given to these options. “C” Corporation - A corporation is a separate legal entity with the characteristics of limited liability, centralization of management, perpetual duration, and ease of transferability of ownership assets. Shareholders are the owners of a corporation, while directors manage its day-to-day affairs. The “C” Corporation is a separate taxable entity that files it’s own tax returns and pays income taxes on any revenues in excess of expenses. Although this option provides limited liability protection to its shareholders, the lack of a profit motive in the consortium would better be served by the Limited Liability Company or a Nonprofit Corporation. Therefore, the research will focus on these business structures. Limited Liability Company – The Limited Liability Company (LLC) is a hybrid entity that has the attributes of both a corporation and a partnership. The owners of an LLC are called “members.” A member can be an individual, partnership, corporation, trust, or any other legal or commercial entity. Generally, the liability of the members is limited to their investment and they may enjoy the pass-through tax treatment afforded to partners in a partnership. All LLC members have the right to participate in the management of the LLC, however, the members may adopt operating agreements to change this rule. When members choose to centralize management, it is referred to as “manager managed.” The limited liability feature of an LLC is an essential feature for an airline consortium, however, taxation as a partnership is a disadvantage. At the members’ discretion, an

102 A Guidebook for Airport-Airline Consortiums October 13, 2010 Page 3 LLC may elect to be taxed as a Corporation, which transfers the tax liability from the members to the LLC. Nonprofit Corporation - A Nonprofit Corporation is a corporation in which no part of the income is distributable to members, directors, or officers [BOC, Section 22.001(5)]. A nonprofit corporation may be created for any lawful purpose, or purposes permitted by the BOC. Not all nonprofit corporations are entitled to exemption from state or federal taxes. The Nonprofit Corporation provides the limited liability protection that a “C” Corporation offers, but also allows for a tax savings providing the consortium meets the income requirements discussed below. Tax Implications Federal Income Tax – It is intended that the airline consortium will balance its revenues and expenses resulting in little or no annual excess revenues over expenses. Since the airline consortium will not produce an annual profit (or loss), it should not be subject to federal income tax. If the airline consortium has no profit or loss and interest income is less than $25,000 annually, it may be categorized as a nonprofit organization. When the airline consortium is categorized as nonprofit, it must file IRS Form 990 - Return of Organization exempt from Income Tax. Further, to achieve tax-exempt status as a business entity, the entity must either apply for an IRS federal tax exemption as a charitable organization, or be a governmental entity. Because an airline consortium is not a charitable organization or a governmental entity, it would not qualify for tax-exempt status. Sales Tax –Since an airline consortium will not be able to achieve tax-exempt status, San Antonio City Tax and Texas State Sales Tax will apply. The current total tax rate is 8.125%. Texas state law limits the overall tax rate to 8.25%. Texas Franchise Tax – Corporations with a Texas charter and non-Texas corporations doing business in Texas must file a Texas franchise tax return. The Texas Franchise Tax for corporations is calculated on the greater of the net taxable capital or net taxable earned surplus. Taxable capital is a corporation’s stated capital (capital stock) plus surplus. Surplus means the net assets of the company minus its stated capital. Earned surplus includes the corporation’s federal net taxable income, plus compensation to officers and directors of the company. For a limited liability company, surplus means the net assets of the company minus its member’s contributions. The Texas Franchise Tax tax rate on taxable capital is 0.25 percent per year. Corporations that owe less than $100 do not pay any tax.

Feasibility Study—Illustrative Example 103 October 13, 2010 Page 4 The LLC provides the desired limited liability for the consortium and the airlines, however its tax implications would unneccesarily complicate the organizational structure of the consortium, From a tax perspective, there are two options available to an LLC. It can be taxed as a “flow-through” entity, whereby any income tax liability would be passed onto its owners (members). This was a major disadvantage with the Partnership and “S” Corporation structures. The other option is for the LLC to be taxed as a “C” Corporation. In this case the LLC itself would file and pay taxes, which was a major disadvantage with the “C” Corporation. Based upon our research, the Nonprofit Corporation is the recommended business structure for the SAT airline consortium. As a corporation, this structure offers the limited liability desired to protect the consortium as well as the individual airlines. It also provides for a perpetual duration that is not offered in a partnership. Therefore, member airlines can change without the business structure itself changing. Because the consortium meets the qualifications of a Nonprofit Corporation, any potential federal income tax issues can also be avoided in this business structure. Organizing a Corporation in Texas The following steps are necessary for organizing a Corporation in the State of Texas: • Select a business name for the corporation and check for availability • Identify Registered Agent • Elect and/or appoint a director or directors for the corporation • Submit a certificate of formation (“articles of incorporation”), with a filing fee of $300 • Set corporation bylaws for governance • Hold organizational meeting • Request Employer Identification Number (EIN) from the IRS • Open bank account These steps can be easily achieved in a timely manner, which will allow for a functioning SAT airline consortium once the form of Member Agreement is finalized. Please let me know any questions or comments. Recommendation