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30 Implementation The consortium implementation process may include the following activities: ⢠Legal formation ⢠Agreement execution ⢠Capitalization ⢠Procurement ⢠Capital project funding ⢠Start-up Legal Formation The legal formation begins with the filing of the articles of incorporation, or their equivalent depending on the business entity structure selected, with the state where the consortium will be incorporated. In some states, this filing may be accomplished over the Internet with an on-line submittal and an instantaneous response. In other states, paper documents must be submitted to the state and are processed in order after all other submittals waiting in the queue. This may take several days or weeks, depending on the length of the queue. In some jurisdictions, it may be pos- sible to pay an extra fee for expedited service. Depending on the jurisdiction, separate corporate bylaws, an LLC operating agreement, or similar documentation may be required in addition to the member agreement. Alternatively, the member agreement may serve as the bylaws, provid- ing it meets the minimum corporate law requirements of the state of formation. Agreement Execution The airlines joining the consortium will execute the consortium member agreements in coun- terpart and submit them to the consortium sponsor. A formation meeting for the consortium may be held by its members, once a sufficient number (as determined by the participants) of member agreements are received. During this meeting, the members approve and adopt the form of the member agreement, accept the agreements submitted, and authorize them for execution by the consortium. Further, officers are elected and the chairperson/president/chief executive officer is authorized to execute the member agreements on behalf of the consortium. The consortium members may also approve other agreements during the formation meeting, and authorize the chairperson/president/chief executive officer to execute them on behalf of the consortium. These other agreements may include the agreement with the airport, non-member access agreements, documents necessary to establish a checking account, and any vendor agreements that are ready to be executed. C H A P T E R 7
Implementation 31 Capitalization Capitalization is also usually addressed during the formation meeting. Typically a consortium requires an operating reserve, equivalent to 2 months of operating expenses, to provide the proper cash flow support for the operation. Membership fees are received from the members that submitted member agreements. These funds are accepted by the consortium and deposited in the consortium checking account and provide the initial capitalization of the consortium. If other sources of funds are to be accessed to capitalize the consortium, the members may also address these other sources during the formation meeting. Procurement The procurement of consortium vendors may begin at the time of the formation meeting, or may have been initiated earlier when the consortium documents were being prepared. It may be necessary to contract consortium vendors in advance of the start of consortium operations to allow them sufficient time to hire employees, secure airport badges, train their employees, and procure sufficient supplies and equipment to fulfill their contract requirements. The type and number of vendors necessary for a successful consortium operation will vary depending on the consortiumâs scope of services and responsibilities. If the procurement of any of the consortium vendors has been completed by the time of the formation meeting, the consortium members may also approve these vendor agreements during the formation meeting, and authorize the consortium chairperson or other officer to execute them on behalf of the consortium. Depending on the type of consortium and the scope of its operations, it may be advisable for the consortium to retain a consultant, engage a management firm, or hire a manager during the start-up phase of the consortiumâs operations. The manager may define the scope of individual services to be provided, prepare bid documents, conduct bid processes, and recommend con- tract awards. The manager may also oversee equipment acquisition, installation, and testing prior to opening. Some airports may require their approval of the procurement processes used, the diver- sity goals included, and the agreements for key vendors. Further, airports may require their approval of the actual vendors selected for each contract, based on the vendorâs qualifications to do the work. Capital Project Funding Similarly, if there is capital financing that is ready to be closed at the time of the formation meeting, consortium members may also approve the financing documents during the formation meeting, and authorize the consortium chairperson or other officer to execute them on behalf of the consortium. Start-Up The final activity in the implementation process for a new consortium is to actually begin operations. It will be necessary to contract with consortium vendors in advance of the start of consortium operations to allow the vendors sufficient time to hire employees, secure airport
32 A Guidebook for Airport-Airline Consortiums badges, train their employees, and procure sufficient supplies and equipment to fulfill their contract requirements. The consortiumâs accounting system, cost allocation and invoicing model, data collection and recording systems, bank accounts, and capitalization must also be in place for a success- ful start-up. Further, the consortium must have approved operating procedures, emergency procedures, and contingency plan manuals completed and deployed to support a successful start-up. The manner in which consortium operations are actually started will depend on the circum- stances for that consortium and its airport. Further, if the start-up of the consortium initiates a capital development, facility operations may be delayed until the development of the new facili- ties is complete. As described below, an airportâs involvement in consortium implementation may vary sig- nificantly, depending on the airport, the scope of the consortium, and if capital financing is involved. Illustrative Examples and Observations 1. Terminal One Group Association, L.P. The TOGA general partner, Terminal One Manage- ment, Inc., was formed on March 17, 1994, by the four participating airlines. TOGA, the limited partnership, was formed on March 22, 1994, after the general partner authorized its formation. The activities associated with these formations and initial meetings were attended by the participating airlines, their counsel, and their consultant. The closing for the TOGA project financing bonds, which included the execution of the Site Lease and all project bond financing documents, was held July 13, 1994. The TOGA member airlines, the PANYNJ, various consultants, and counsel attended the preparation meetings and final closing. The execution of the Site Lease and the closing of the project financing bonds initiated the development of the new JFK Terminal One, which included demolishing the existing structures on the site, remediating the soil for hydrocarbon pollutants, and designing and constructing the new terminal. The new facilities opened for service on May 28, 1998. The TOGA member airlines actively participated in and managed the development of the new ter- minal facilities. The PANYNJ approved plans and inspected work as construction proceeded, ultimately issuing an occupancy permit for the new terminal. TOGA was initially capitalized by small member contributions made by the participating airlines. Additionally, the participating airlines paid the formation costs, which were eventu- ally reimbursed to them when the project financing became available. Also, during the devel- opment period, TOGA was able to sublease a portion of the Terminal One site to a commuter airline. The resulting revenue also served to capitalize TOGA. Annual status meetings are held between the member airlines and the PANYNJ, as required by the Site Lease. TOGA documents its full and effective use of the Terminal One facilities, since the terms of the Site Lease allow the PANYNJ the right to take control of gates if they are underutilized. Periodically, the PANYNJ audits the financial performance of TOGA to ensure that han- dling, sub-rental, and concessions fees have been properly recorded and TOGA has paid all amounts due. The PANYNJ has not required any other measures of TOGAâs performance. 2. DEN Consortium, LLC. DENCO was formed on September 14, 2011 and held an organi- zational meeting on October 19, 2011. The member airlines elected officers, approved the
Implementation 33 member agreement, approved a number of administrative items such as the opening of a new checking account for the company, and approved a deicing fluid acquisition contract. DENCO was capitalized with membership fees. The administrative and operational expenses of the consortium are minimal, and are funded by the membership fees. The con- sortium members replenish these funds through an annual usage payment. Airport staff was not involved in the meeting since the consortium is not leasing, operat- ing, or maintaining any airport-owned assets. The participating airlines engaged a consultant to assist them with the formation activities. No outside legal counsel was used. Neither the DENCO airline members nor the airport have established performance metrics for DENCO. 3. LAX Shared Use Lounge Company, LLC. LAXSUL was formed on June 15, 2005, and held its organizational meeting on June 23, 2005. Membership fees initially capitalized LAXSUL. Further, LAXSUL engaged a consultant to assist it with project development and reached an agreement that the consultant would be paid when project financing became available. LAXSUL also engaged an architect to develop plans for the lounge, and the member airlines provided temporary funding for the design effort, which was repaid to them when project financing became available. LAXSUL entered into a lease with LAWA for the lounge premises on May 16, 2006, and closed on a $5 million project financing bank loan on November 13, 2006. The new lounge facilities opened for use on August 17, 2007. The participating airlines engaged a consultant to assist them with the formation activities. Outside legal counsel was used to assist with bank loan documentation. Neither the LAXSUL airline members nor the airport have established performance metrics for LAXSUL. 4. Detroit Airlines North Terminal Consortium. DANTeC was formed on October 19, 2007, as a domestic nonprofit corporation in the State of Michigan. Its primary documents include a member agreement between the consortium and its members, and a Consortium Agreement between the consortium and the WCAA. The participating airlines requested that the consortium operating budget be included in rates and charges, which would eliminate significant capitalization requirements for the new consortium. The WCAA agreed to this request for the expenses related to the operation and maintenance of airport-owned assets. The WCAA collects payment from the airlines and pays DANTeC monthly for the expenses it has incurred, thereby enabling DANTeC to pay its vendors. Further, DANTeC was capitalized by membership fees. These funds support the cash flow related to service contracts held by DANTeC that are not related to the operation and maintenance of airport assets (i.e., wheelchairs, ticket checkers, etc.). During the early stages of consortium consideration, the WCAA expressed concerns regarding the maintenance and operation of airport-owned facilities, equipment, and sys- tems assigned to the consortium, as a result of their experience with other airline maintained assets at the airport. A Minimum Service Levels exhibit was developed and included as a com- ponent of the Consortium Agreement. The Minimum Service Levels exhibit sets forth goals and objectives, periodic reporting and review requirements, and service level requirements. The service level definitions clearly and concisely describe maintenance responsibilities, fre- quencies, and performance metrics. DANTeC and the WCAA executed the Consortium Agreement on April 16, 2008, and the North Terminal opened on September 18, 2008. Since that time, DANTeC has been fully compliant with all the covenants and requirements of the Consortium Agreement. Further, DANTeC has met all, and exceeded most, of the Minimum Service Levels requirements. The WCAA had enough confidence in DANTeCâs performance to significantly expand DANTeCâs scope during 2012. As indicated by these illustrative examples, the implementation of a new consortium must proceed through a number of steps and must fulfill all the requirements established by the
34 A Guidebook for Airport-Airline Consortiums stakeholders and the consortium documents. However, the circumstances of each consortium affect all aspects of that consortium including the documents, the capitalization, and the estab- lishment of performance metrics. The steps described in Chapters 2 through 7 of this Guidebook provide a simplified pathway for those seeking to evaluate or form a new consortium at their airport. However, because each consortium is unique, Chapter 8 offers additional decision-making guidance and considerations for more complex circumstances.
