A Guidebook for Airport-Airline Consortiums (2014)

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6The consortium concept is widely and generally known throughout the commercial airport and airline industry as a tool for managing common use facilities, equipment, systems, and services for groups of airlines. Because consortiums exist at some of the largest airports in the United States, most airlines operating in the United States have experience as consortium mem- bers. Additionally, many airport executives are also familiar with the consortium concept and are casually informed regarding the possible applications and utility of airline consortiums. Generally, a consortium begins as an idea that there may be a more economical or more opera- tionally efficient way to manage facilities, equipment, systems, or services at an airport. Typically, this notion will only make progress toward reality if there is a sponsor who is willing to promote the concept among its colleagues. Often, the consortium sponsor is a single airline that has indepen- dently developed a preliminary, conceptual understanding of possible consortium benefits at its airport. However, there are also circumstances when the airport operator is motivated to promote a consortium and, therefore, effectively serves as the consortium sponsor. The primary stakeholders and beneficiaries of a consortium are airlines. As such, airlines generally promote consortium development. The airport operator also has an interest in the suc- cess of a consortium venture, since a consortium will often be responsible for the operation and maintenance of airport assets and the consortium may be able to provide benefits that otherwise may not be available to the airport. Airline motivations for proposing a consortium may include any combination of the following: • Reducing operating costs • Improving service levels • Shifting the responsibility for operations and services from the airport to the airlines • Shifting the responsibility for development from the airport to the airlines • Raising capital for a new facility Airport management motivations for promoting a consortium may include any combination of the following: • Reducing operating costs • Improving service levels • Shifting the responsibility for operations and services from the airport to the airlines • Shifting the responsibility for development from the airport to the airlines • Shifting operational, legal, and environmental risk from the airport to the airlines • Assigning expense responsibilities to the airlines to reduce the airport’s cost per enplaned passenger • Raising capital for a new facility • Providing additional liability protection C H A P T E R 2 Initial Consensus

Initial Consensus 7 During the early stages of consortium development, it is imperative that the purpose, scope and objectives for the consortium be identified and documented on a preliminary basis. The pre- liminary documentation of purpose, scope, and objective allows the concept of the consortium to be effectively described to all stakeholders, which results in ultimate support or abandonment of the consortium concept. The consortium concept will not progress toward reality until an initial positive consensus has been developed among the stakeholders. When sufficient support has developed for the con- sortium opportunity, one or more of the stakeholders will authorize the expenditure of funds for a feasibility study to further examine the application of the consortium model to specific circumstances. There are many reasons that the consortium concept may not attract sufficient support or funding for the implementation of a feasibility study during initial consensus building, when there are generally insufficient facts available related to the proposed consortium. As a result, individuals may hold negative opinions regarding a proposed consortium. From the airline perspective, these opinions may include the following: • The consortium model will not produce sufficient savings. • The consortium will benefit some stakeholders more than others. • Too much effort/cost/time will be required to implement a consortium. • It will be difficult to secure approval from headquarters. • The current operating and financial situation is acceptable and should, therefore, not change. From the airport perspective, negative opinions regarding a proposed consortium may include the following: • The consortium will diminish the airport’s authority. • The airport will lose control over airport assets and operations. • The consortium’s incentive to reduce costs may negatively impact the maintenance levels for airport assets. • The consortium model will not produce sufficient savings. • The consortium will reduce or otherwise negatively affect jobs at the airport. • The consortium may result in the dominance of certain airline members, which may become a barrier for new entrants. The process of developing the consortium framework and achieving sufficient stakeholder approval to proceed may require a few weeks to several years, depending on the circumstances and the interests of the stakeholders. However, the most productive approach to building con- sensus is to develop, distribute, and explain documentation that accurately describes the pro- posed consortium’s benefits. Illustrative Examples and Observations Provided below are illustrative examples that summarize the initial consensus process for selected consortiums. These examples indicate a broad range of purpose for these consortiums and the different formational approaches taken for each. 1. Terminal One Group Association, L.P. (TOGA). TOGA was formed as a New York Limited Partnership in 1994 by four partner airlines to develop, manage, and operate a new passenger terminal at John F. Kennedy International Airport (JFK). The Port Authority of New York and New Jersey (PANYNJ) was the operator of Terminal Four (the old International Arrivals Building) and was not focused on lowering costs for the airlines. TOGA was formed so the airlines could control the terminal design, development, and construction process resulting in an improved passenger experience with reduced operating costs.

8 A Guidebook for Airport-Airline Consortiums The TOGA consortium was initially conceived by a single airline that was discontented with the JFK International Arrivals Building experience and understood the opportunity for the development of an airline-sponsored unit terminal at JFK. This airline solicited other airlines to participate, and together they approached the PANYNJ. Ultimately, there was consensus among a sufficient number of the participating airlines to fund a feasibility study and to begin negotiations with the PANYNJ. The PANYNJ, however, had no participation in the development of the TOGA consortium, other than to negotiate with the airlines for the lease of the Terminal One site and the development of a new terminal facility. 2. CICA Terminal Equipment Corporation (CICA TEC). CICA TEC was formed as a not- for-profit corporation, organized in the state of Illinois, in 1990. CICA TEC was formed to procure and install airline equipment and facilities for a new international terminal at Chi- cago O’Hare International Airport (ORD), and to operate and maintain the equipment and facilities after the terminal opening. Prior to the formation of CICA TEC, the participating airlines formed the Chicago Inter- national Carriers Association (CICA) to work with the City of Chicago on the planning and design of the new international terminal. The participating airlines that had experience with the LAX Terminal Equity Corporation (LAXTEC) consortium in Los Angeles recommended forming an airline consortium for the international terminal at ORD. Collaboratively, the City of Chicago agreed with the consortium concept. As a result, airline responsibility for the operation and maintenance of certain equipment, facilities, and systems was incorporated into the Use and Lease Agreement negotiations as the new international terminal project progressed. 3. Oakland Fuel Facilities Corporation (OFFC). OFFC was formed as a nonprofit corporation, organized in the State of California, in 1989. The OFFC was formed to economically provide fuel system maintenance and operations in a unified efficient manner. This was accomplished by replacing the airport provided fueling services with an airline operated fueling consor- tium. A key motivating factor included the ability to secure third-party financing, rather than utilizing Port of Oakland (Port) funding. The Port conducted a financial and operational fea- sibility study to evaluate whether the Port should construct and operate the new fuel facility. As a result, the Port and the airlines agreed that it was in the best interest of all entities for the airlines to form a fuel consortium to address third-party project funding, to allow the airlines to manage the design and construction of the new fueling facility, and to provide for airline managed fuel operations once the facility was completed. 4. The DEN Consortium, LLC (DENCO). DENCO was formed as a Colorado Limited Liability Company in 2011 by nine airline members to act as the legal entity for the acquisition of deicing fluid at Denver International Airport (DEN). Continental Airlines previously held the contract with a vendor to provide deicing fluid to the airlines; however, Continental Airlines was not able to continue holding this contract. The participating airlines examined several approaches to dealing with this issue, including the formation of a consortium. The consor- tium concept was not necessarily promoted as the most advantageous approach. However, the participating airlines retained the consortium concept as one viable option as alternative approaches were examined. DENCO did not execute an operating agreement with the airport, since the consortium is not leasing, operating, or maintaining airport owned assets. However, DEN property and legal representatives were very supportive by providing their input along with pertinent data during the feasibility process. Airport staff supported the consortium concept as the most effective manner to ensure that the airlines were prepared to address the upcoming snow season. 5. The LAX Shared Use Lounge Company, LLC (LAXSUL). LAXSUL was formed as a Delaware Limited Liability Company in 2006 by nine airline members to develop, finance, manage, and operate a new premium passenger lounge in the Tom Bradley International Terminal (TBIT) at Los Angeles International Airport (LAX). Los Angeles World Airports (LAWA) initiated

Initial Consensus 9 a renovation program for TBIT that included a consolidation of airline lounges. Airline alliance members developed joint alliance lounges, while the airlines that did not belong to alliances were required to work together to develop a lounge for the common use of their passengers. The participating airlines requested proposals from various companies regard- ing cost-effective approaches to developing and operating a new lounge facility. One of the proposals focused on forming a consortium. This proposal was given due consideration and was ultimately accepted when proposals were evaluated. LAWA was not involved in any part of the LAXSUL formation process. As described by these illustrative examples, there are many factors that could motivate airlines and airports to entertain the consortium concept. These factors include financial, operating, legal, and service level concerns. Once the airlines and airport staff achieve consensus that a consortium entity could provide benefits to address these concerns, it is necessary to devote resources to perform a feasibility study to determine the extent of these benefits. Chapter 3 outlines the purpose, tasks, and deliverables necessary to perform a meaningful feasibility study.