Airport/Airline Agreements—Practices and Characteristics (2010)

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TRANSPORTAT ION RESEARCH BOARD WASHINGTON, D.C. 2010 www.TRB.org A I R P O R T C O O P E R A T I V E R E S E A R C H P R O G R A M ACRP REPORT 36 Research sponsored by the Federal Aviation Administration Subscriber Categories Aviation Airport/Airline Agreements— Practices and Characteristics Joseph M. Faulhaber Jeffrey J. Schulthess RICONDO & ASSOCIATES, INC. Cincinnati, OH Andrew C. Eastmond RICONDO & ASSOCIATES, INC. Chicago, IL Scott P. Lewis ANDERSON & KREIGER LLP Boston, MA Roy W. Block R.W. BLOCK CONSULTING, INC. Orlando, FL

AIRPORT COOPERATIVE RESEARCH PROGRAM Airports are vital national resources. They serve a key role in trans- portation of people and goods and in regional, national, and inter- national commerce. They are where the nation’s aviation system connects with other modes of transportation and where federal respon- sibility for managing and regulating air traffic operations intersects with the role of state and local governments that own and operate most airports. Research is necessary to solve common operating problems, to adapt appropriate new technologies from other industries, and to introduce innovations into the airport industry. The Airport Coopera- tive Research Program (ACRP) serves as one of the principal means by which the airport industry can develop innovative near-term solutions to meet demands placed on it. The need for ACRP was identified in TRB Special Report 272: Airport Research Needs: Cooperative Solutions in 2003, based on a study spon- sored by the Federal Aviation Administration (FAA). The ACRP carries out applied research on problems that are shared by airport operating agencies and are not being adequately addressed by existing federal research programs. It is modeled after the successful National Coopera- tive Highway Research Program and Transit Cooperative Research Pro- gram. The ACRP undertakes research and other technical activities in a variety of airport subject areas, including design, construction, mainte- nance, operations, safety, security, policy, planning, human resources, and administration. The ACRP provides a forum where airport opera- tors can cooperatively address common operational problems. The ACRP was authorized in December 2003 as part of the Vision 100-Century of Aviation Reauthorization Act. The primary partici- pants in the ACRP are (1) an independent governing board, the ACRP Oversight Committee (AOC), appointed by the Secretary of the U.S. Department of Transportation with representation from airport oper- ating agencies, other stakeholders, and relevant industry organizations such as the Airports Council International-North America (ACI-NA), the American Association of Airport Executives (AAAE), the National Association of State Aviation Officials (NASAO), and the Air Transport Association (ATA) as vital links to the airport community; (2) the TRB as program manager and secretariat for the governing board; and (3) the FAA as program sponsor. In October 2005, the FAA executed a contract with the National Academies formally initiating the program. The ACRP benefits from the cooperation and participation of airport professionals, air carriers, shippers, state and local government officials, equipment and service suppliers, other airport users, and research orga- nizations. Each of these participants has different interests and respon- sibilities, and each is an integral part of this cooperative research effort. Research problem statements for the ACRP are solicited periodically but may be submitted to the TRB by anyone at any time. It is the responsibility of the AOC to formulate the research program by iden- tifying the highest priority projects and defining funding levels and expected products. Once selected, each ACRP project is assigned to an expert panel, appointed by the TRB. Panels include experienced practitioners and research specialists; heavy emphasis is placed on including airport pro- fessionals, the intended users of the research products. The panels pre- pare project statements (requests for proposals), select contractors, and provide technical guidance and counsel throughout the life of the project. The process for developing research problem statements and selecting research agencies has been used by TRB in managing cooper- ative research programs since 1962. As in other TRB activities, ACRP project panels serve voluntarily without compensation. Primary emphasis is placed on disseminating ACRP results to the intended end-users of the research: airport operating agencies, service providers, and suppliers. The ACRP produces a series of research reports for use by airport operators, local agencies, the FAA, and other interested parties, and industry associations may arrange for work- shops, training aids, field visits, and other activities to ensure that results are implemented by airport-industry practitioners. ACRP REPORT 36 Project 1-07 ISSN 1935-9802 ISBN 978-0-309-15509-0 Library of Congress Control Number 2010937482 © 2010 National Academy of Sciences. All rights reserved. COPYRIGHT INFORMATION Authors herein are responsible for the authenticity of their materials and for obtaining written permissions from publishers or persons who own the copyright to any previously published or copyrighted material used herein. Cooperative Research Programs (CRP) grants permission to reproduce material in this publication for classroom and not-for-profit purposes. Permission is given with the understanding that none of the material will be used to imply TRB or FAA endorsement of a particular product, method, or practice. It is expected that those reproducing the material in this document for educational and not-for-profit uses will give appropriate acknowledgment of the source of any reprinted or reproduced material. For other uses of the material, request permission from CRP. NOTICE The project that is the subject of this report was a part of the Airport Cooperative Research Program, conducted by the Transportation Research Board with the approval of the Governing Board of the National Research Council. The members of the technical panel selected to monitor this project and to review this report were chosen for their special competencies and with regard for appropriate balance. The report was reviewed by the technical panel and accepted for publication according to procedures established and overseen by the Transportation Research Board and approved by the Governing Board of the National Research Council. The opinions and conclusions expressed or implied in this report are those of the researchers who performed the research and are not necessarily those of the Transportation Research Board, the National Research Council, or the program sponsors. The Transportation Research Board of the National Academies, the National Research Council, and the sponsors of the Airport Cooperative Research Program do not endorse products or manufacturers. Trade or manufacturers’ names appear herein solely because they are considered essential to the object of the report. Published reports of the AIRPORT COOPERATIVE RESEARCH PROGRAM are available from: Transportation Research Board Business Office 500 Fifth Street, NW Washington, DC 20001 and can be ordered through the Internet at http://www.national-academies.org/trb/bookstore Printed in the United States of America

CRP STAFF FOR ACRP REPORT 36 Christopher W. Jenks, Director, Cooperative Research Programs Crawford F. Jencks, Deputy Director, Cooperative Research Programs Michael R. Salamone, ACRP Manager Eileen P. Delaney, Director of Publications Kami Cabral, Senior Editor ACRP PROJECT 1-07 PANEL Field of Administration Susan Warner-Dooley, Minneapolis-Saint Paul Metropolitan Airports Commission Minneapolis, MN (Chair) R. Borgan Anderson, Seattle-Tacoma International Airport, Seattle, WA Kenneth J. Cushine, Frasca & Associates, New York, NY Brian Davis, Allegiant Air, Las Vegas, NV John DeCoster, Trillion Aviation LLC, Brooklyn Park, MN Kelly L. Johnson, Northwest Arkansas Regional Airport Authority, Bentonville, AR Brian Picardat, Kent County (MI) Department of Aeronautics, Grand Rapids, MI Edward E. Shelswell-White, Southwest Airlines Company, Dallas, TX Liying Gu, Airports Council International–North America Liaison Laura McKee, Air Transport Association of America, Inc. Liaison Andrea Toney, FAA Liaison Christine Gerencher, TRB Liaison AUTHOR ACKNOWLEDGMENTS This resource manual (the “Manual”) was prepared as part of ACRP Project 01-07. The prime contrac- tor was Ricondo & Associates, Inc. (R&A). The subcontractors were Anderson & Kreiger LLP (Scott Lewis) and R.W. Block Consulting, Inc. (Roy Block and David Benouaich). The Principal Investigator was Joseph Faulhaber, R&A Senior Vice President, and the Associate Principal Investigator was Jeffrey Schulthess, R&A Director. Additional research and writing support was provided by Andrew Eastmond and other members of R&A’s finance practice. Many individuals from a variety of airports and airlines as well as the investment community provided vital input to the Manual through their participation in focus groups and online surveys. Valuable production assistance was provided by Natalie Leaman, Andrea Arnold and other members of the graphics design and production team at R&A. In addition, the input and guidance of ACRP staff and the ACRP Project 01-07 panel for this project are gratefully acknowledged. C O O P E R A T I V E R E S E A R C H P R O G R A M S

ACRP Report 36: Airport/Airline Agreements—Practices and Characteristics provides an objective resource tool to assist both airport operators and airlines with negotiating and understanding various aspects related to airline/airport operator business relationships– including those in use and lease agreements–by enhancing mutual understanding of each other’s decision-making process during negotiations. The report presents examples and material collected from many airports to help clarify the thought process and perspective of both airports and airlines during negotiations. Other industry stakeholders such as rating agencies, investment bankers, and financial advisors will also find this report informative and useful. Under ACRP Project 01-07, Ricondo & Associates, Inc. was directed to examine the breadth of knowledge and variety of practices that exist in the airport industry guiding the relationships between airport operators and perhaps their most important tenant, the air- line. Through survey, focus groups, workshops, and in-depth discussions, the research team engaged executives from both airport operators and airlines of various sizes and character- istics, conducted several focus groups, and interviewed dozens of frontline negotiators. Research helped gain insight into the more subjective and complex nature of airport/airline relationships that may be difficult to acquire through other means or a written survey. Inter- active discussions provided valuable insight and perspectives related to agreement negotia- tions, the development of rate-setting approaches, and other critical issues associated with the overall business relationships between parties. F O R E W O R D By Michael R. Salamone Staff Officer Transportation Research Board

P A R T 1 WHY IS THERE A NEED FOR THIS MANUAL? 3 Chapter 1 Introduction 3 1.1 Intent and Purpose of the Manual 5 1.2 Study Methodology 6 1.3 Organization and Structure of the Manual 7 Chapter 2 Background 7 2.1 Purpose of Agreements 7 2.2 Non-Agreement Approach 8 2.3 Types of Business Arrangements and Rate-Setting Methodologies 14 2.4 Recent Trends in Airport/Airline Business Arrangements P A R T 2 HOW DO WE GET STARTED? 19 Chapter 3 Negotiation Process and Schedule 19 3.1 Typical Airline Negotiation Process 24 3.2 Typical Airport Operator Negotiation Process 27 Chapter 4 Key Items to Identify Prior to a Negotiation 27 4.1 Goals and Objectives 30 4.2 Identifying Particular Negotiation Strengths and Weaknesses 31 4.3 Cost Centers and Allocations of Expenses and Revenues 33 4.4 Capital Program Requirements 35 4.5 Airline Rates and Charges Analysis 38 Chapter 5 Legal Constraints and Issues 39 5.1 Rates and Charges 42 5.2 Facility Control 42 5.3 Control of Capital Program 42 5.4 Boilerplate 43 Chapter 6 Investment Community Concerns and Issues 43 6.1 Airports and the U.S. Municipal Bond Market 45 6.2 Rate-Setting Mechanism 47 6.3 Term of the Agreement 48 6.4 Gate Assignments and Usage 48 6.5 Capital Planning 49 6.6 Limitations C O N T E N T S

P A R T 3 ROADBLOCKS WE MAY ENCOUNTER 55 Chapter 7 Discretionary and Surplus Revenue 55 7.1 Background 56 7.2 Impact on and Importance to Airport Operators 56 7.3 Impact on and Importance to Airlines 56 7.4 Various Alternatives for Treatment in Agreements 57 7.5 Linkages to Other Agreement Provisions 58 Chapter 8 Capital Project Control and Consultation 58 8.1 Background 59 8.2 Impact on and Importance to Airport Operators 60 8.3 Impact on and Importance to Airlines 60 8.4 Various Alternatives for Treatment in Agreements 62 8.5 Linkages to Other Agreement Provisions 63 Chapter 9 Facility Control 63 9.1 Background 64 9.2 Impact on and Importance to Airport Operators 64 9.3 Impact on and Importance to Airlines 64 9.4 Various Alternatives for Treatment in Agreements 65 9.5 Linkages to Other Agreement Provisions 66 Chapter 10 Signatory Status 66 10.1 Background 66 10.2 Impact on and Importance to Airport Operators 67 10.3 Minimum Requirements 68 10.4 Treatment of All-Cargo Airlines 68 10.5 Classes of Airlines 68 10.6 Rights and Privileges 68 10.7 Impact on and Importance to Airlines 69 10.8 Various Alternatives for Treatment in Agreements 69 10.9 Linkages to Other Agreement Provisions 70 Chapter 11 Terminal Rental Rate Methodologies and Considerations 70 11.1 Terminal Rental Rate Divisors and Methodologies 72 11.2 Equalized versus Differential Terminal Rental Rates 75 11.3 Weighted Rental Rates 76 Chapter 12 Joint Use Formulas 76 12.1 Background 77 12.2 Impact on and Importance to Airport Operators 77 12.3 Impact on and Importance to Airlines 77 12.4 Various Alternatives for Treatment in Agreements 78 12.5 Linkages to Other Agreement Provisions 79 Chapter 13 Affiliates 79 13.1 Background 79 13.2 Impact on and Importance to Airport Operators 80 13.3 Impact on and Importance to Airlines 80 13.4 Various Alternatives for Treatment in Agreements 81 13.5 Linkages to Other Agreement Provisions

82 Chapter 14 Airport Financial Liquidity and Debt Service Coverage 82 14.1 Background 83 14.2 Impact on and Importance to Airport Operators 84 14.3 Impact on and Importance to Airlines 84 14.4 Various Alternatives for Treatment in Agreements 85 14.5 Linkages to Other Agreement Provisions P A R T 4 WHERE DO WE GO FROM HERE? 89 Chapter 15 Potential Future Provisions and Issues 89 15.1 Airline Mergers 89 15.2 Airline Bankruptcies 90 15.3 Consortiums 91 15.4 Emergence of Specialty Carrier Business Models 91 15.5 Air Service Incentive Programs 93 Appendix A Annotated Bibliography 94 Appendix B Sample of Table of Contents for Typical Agreement 93 Appendix C CIP Primer 97 Appendix D Sample Items Generally Included in Rates and Charges Negotiation Documents 98 Appendix E Glossary of Key Terms 93 Appendix F Airport Online Survey Note: Many of the photographs, figures, and tables in this report have been converted from color to grayscale for printing. The electronic version of the report (posted on the web at www.trb.org) retains the color versions.