Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
10 Once consensus has been achieved among the stakeholders that the feasibility of an airline consortium should be examined and funds have been authorized for a feasibility study, a quali- fied consultant should be selected to perform a feasibility study. Before the consultant can properly perform the feasibility study, the consortium sponsor should advise the consultant of the following: ⢠Purpose of the consortium ⢠Preliminary scope of the consortium ⢠Proposed membership of the consortium ⢠Objectives of the consortium ⢠Any known constraints or obstacles The feasibility study will include a number of tasks, including the following: ⢠Preparation of a business plan ⢠Preparation of a preliminary capital budget, if applicable ⢠Preparation of a capital-funding plan, if applicable ⢠Description of the documents to be developed to implement the consortium Depending on the specific circumstances for the proposed consortium, the feasibility study may also include data gathering and analysis regarding potential efficiencies and cost savings that may be gained by the consortium. The stakeholders may also request that the feasibility study address the practicality of forming a consortium to perform the scope of services under consideration. During the preparation of the feasibility study, the consultant should gather information by interviewing stakeholders, by reviewing established budgets and contracts, and by becoming familiar with the facilities, equipment, systems and services the consortium will be responsible for. A completed consortium business plan should describe the following: ⢠Recommended business entity structure (options are described in Chapter 4) ⢠Scope of services and responsibilities of the consortium ⢠Preliminary operating budget ⢠Recommended methodology for allocating costs among the consortium members ⢠Capitalization plan including the identification of source of funds If the consortium will be responsible for capital development, the feasibility study should describe the capital projects, include a preliminary capital budget, and describe a recommended capital-funding plan including source of funds, estimated debt service, and any applicable funding restrictions. Airport business, legal, and engineering departments should be consulted to deter- mine any particular requirements, restrictions, or processes that would affect the development. C H A P T E R 3 Feasibility Study
Feasibility Study 11 If bond funding is being considered, the City and/or its designated bond issuance agency or their legal counsel should also be consulted. If it is determined that airport funds will be used for capital development, or any other pur- pose associated with the consortium, the financial stakeholders should be consulted very early in the process to allow sufficient time for approvals and documentation. The feasibility study may also include a description of the following documents and agree- ments to be drafted to implement the consortium: ⢠Agreement with Airport ⢠Member Agreement ⢠Non-Member Access Agreement ⢠Financing Documents (if applicable) ⢠Articles of Incorporation The form of these documents will vary widely from consortium to consortium depending on the circumstances, the business entity selected, the preferences of the stakeholders, the scope of the consortium, whether third-party financing is necessary, and the jurisdictional requirements. The conclusion of the feasibility study is often a presentation to the stakeholders that explains the feasibility study findings. Stakeholder interest in the feasibility study varies widely depending on the circumstances and the relationships between the parties. Often, the airlines are primarily interested in the proposed scope, potential cost savings, cost allocation methodologies, and capitalization requirements for the new consortium. Airports are also focused on consortium scope, especially when airport owned assets would be assigned to the consortium to operate and maintain. Often, airports are also interested in the key provisions of the consortium documents and agreements. Airports may also require that ⢠Consortium membership be open to new entrants, ⢠Consortium procurement practices be in compliance with airport procurement practices includ- ing local diversity goals, ⢠Airport defined indemnification language be included in the consortium documents, ⢠The consortium procure insurance that meets or exceeds airport established requirements, ⢠Maintenance standards for airport assets ensure the preservation of those assets, ⢠Airport labor standards be addressed by consortium procurement practices, and ⢠An airport representative be included in the governing body of the consortium. Airports also frequently express concerns that the implementation of a consortium may nega- tively affect jobs at the airport. To ensure an effective and appropriate outcome, all stakeholder concerns should be identified in advance and addressed by the feasibility study. Illustrative Examples and Observations 1. Terminal One Group Association, L.P. The TOGA participating airlines funded a financial feasibility study that compared the estimated costs of a newly developed Terminal One with the estimated costs of continuing operations at the old International Arrivals Building. The results of the study were favorable and supported the formation of the TOGA consortium. The PANYNJ was not involved in the TOGA financial feasibility study. Instead, the PANYNJ was focused on securing a ground lease and a commitment to develop a new passenger ter- minal facility. The PANYNJ left the decision to proceed with the TOGA venture to the par- ticipating airlines.
12 A Guidebook for Airport-Airline Consortiums 2. Oakland Fuel Facilities Corporation. The Port of Oakland conducted a financial and opera- tional feasibility analysis related to the construction of a new fuel facility at OAK. Both the Port and the airlines agreed that it was in the best interest of all parties for the airlines to form a fuel consortium to provide third-party project funding and airline-managed fuel operations after the facility was completed. 3. DEN Consortium, LLC. Various financial and business analyses were performed for DENCO to help the airlines compare and analyze the business options available to them for jointly holding a common deicing fluid supply contract. As options were reviewed, the analyses were updated a number of times to accommodate scope revisions (equipment maintenance ver- sus no equipment maintenance) and various methodologies for allocating consortium costs to the airlines. DEN property and legal representatives were supportive of the consortium concept because it was beneficial to the airlines, and ensured that deicing material would be available for the upcoming snow season. They assisted in the business analyses by providing data to support the analyses and committing to operate and maintain certain deicing storage and dispensing equipment that otherwise would have become the responsibility of DENCO. However, the airport was not involved in the decision to proceed with DENCO. 4. LAX Shared Use Lounge Company, LLC. A financial business analysis was prepared for LAXSUL to estimate the amount of capital necessary for the development of the proposed lounge facility, financing alternatives, debt service, operating costs, and costs per use. This analysis enabled the participating airlines to decide to proceed with the formation of LAXSUL. LAWA was not involved in, or a recipient of, the LAXSUL business analysis. Instead, LAWA was focused on securing a lease and a commitment to develop a new premium passenger lounge facility. LAWA left the decision to proceed with the LAXSUL venture to the partici- pating airlines. 5. Norman Y. Mineta San Jose International Airport (SJC) and Indianapolis International Airport (IND). It should be noted that not all consortium ventures proceed after a feasibility study is prepared and presented. Consortiums were proposed by the airlines for both IND and SJC as a means to reduce operating and maintenance costs. However, in both cases, the feasibility studies indicated that the estimated cost savings produced by the consortiums could also be achieved under the current operating conditions, making the consortiums unnecessary. At SJC, the airport staff had contracted out many functions that were previ- ously performed by local government staff, and could continue in that direction to achieve the projected savings. At the time of the feasibility study, operations at IND were being con- ducted in a cost-effective manner and it was determined that a consortium could not reduce costs much further. 6. Phoenix Sky Harbor International Airport (PHX). A consortium was also proposed for the operation and maintenance of common use facilities at PHX, and a feasibility study identified that sufficient savings were possible to make the consortium feasible. However, the airport required significant cash deposits to provide for the security of the airport-owned assets that would be assigned to the consortium. The funding of the security deposits made the consor- tium financially unfeasible. 7. San Antonio Airlines Consortium. A consortium feasibility study was recently prepared for San Antonio International Airport (SAT) with the dual focus of identifying the scope and developing a preliminary operating budget for the proposed consortium. The study did not, however, include an estimate of savings the consortium would produce because the consor- tium was being implemented in a new facility where there was not an existing cost history. The airport served as the project sponsor by funding the study. The SAT feasibility study is attached as an illustrative example as Appendix E. This study resulted in the formation of the San Antonio Airlines Consortium (SAAC) in 2011. 8. Ontario International Airport Terminal & Equipment Company (ONT-TEC). A feasibility study was also recently prepared for Ontario International Airport (ONT). This study indicated
Feasibility Study 13 that the consortium model would produce estimated annual savings of approximately $4.7 mil- lion or 19%, compared with the same scope of services administered by LAWA. The estimated savings resulted from the projected reduction of administrative overhead costs, the estimated reduction in labor cost rates, and recommended adjustments in staffing levels. The actual first year operating budget of the ONT-TEC was substantially smaller than what was estimated in the feasibility study as a result of competitively bidding contract services, resulting in additional savings for the airlines. As indicated by these illustrative examples, consortium feasibility studies can be described as follows: ⢠They are tailored to address the requirements and concerns of the stakeholders. ⢠They may be updated a number of times as additional information becomes available. ⢠They do not always result in a decision to form consortium. An important aspect of a feasibility study is to select an appropriate form of legal entity for the proposed consortium that will provide the most advantageous level of financial, tax, and legal protections. Chapter 4 describes the various factors involved in the appropriate selection of a business entity for a consortium.
