Airport/Airline Agreements—Practices and Characteristics (2010)

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PART IV WHERE DO WE GO FROM HERE?

The aviation industry is a very dynamic industry where conditions can change dramatically in short periods of time, and it is challenging to stay on top of how the industry may change. The only certainty regarding the future of the aviation industry is that it will change and that change will most likely be relatively significant. Therefore, it is important that business arrangements between airlines and airports allow for some flexibility to account for these changes. This chapter identifies some of the trends or events that are occurring or are considered emerging at this time and how they relate to future provisions and issues within Agreements or other business arrangements. 15.1 Airline Mergers In recent years, there have been several major airline mergers and there is a real prospect of con- tinuing consolidation in the airline industry. Airline mergers can have major consequences for an airport and for all the airlines that serve it. However, the impacts are difficult to predict and will vary widely depending on the nature of the combining airlines, their respective roles in the local market, and a wide variety of other circumstances. The rapidly changing complexion of the airline industry has been a major factor contributing to the desire of both airport operators and airlines to move toward short-term rather than long-term Agreements. In negotiating Agreements, airport operators may wish to maximize their ability to control the assignment and use of terminal space in the event of an airline consolidation; airlines, however, may seek to maximize their ability to combine operations and reduce costs in the event they merge during the term of an Agreement. It is difficult to predict the future of the airline industry; however, if consolidation becomes more prevalent, airport operators and airlines should seek to be positioned for this in their Agreements. Certain issues that could arise with mergers or consolidation include termination of Agreements, assignment of terminal space, and provisions regarding affiliated airlines. It is important that Agreements clearly state the conditions that must occur for airlines to merge into one carrier (e.g., level of ownership, single operating certificate). Once these conditions have been met, it is also important to clearly indicate what the surviving airline’s obligations are regarding facilities and space leased by the absorbed carrier(s). Because an Agreement typically involves a contractual rela- tionship between the airport operator and several airlines, the potential operational and financial impacts resulting from an airline merger extend beyond just the consolidating carriers. 15.2 Airline Bankruptcies There have been many airline bankruptcies since the airline industry was deregulated 1978. In the years following September 11, 2001, airline bankruptcies have become a frequent occurrence. As a result, it is important to keep the possibility of airline bankruptcies in mind when new 89 C H A P T E R 1 5 Potential Future Provisions and Issues

Agreements are negotiated. Airport operators are motivated to limit their potential losses and max- imize their operational flexibility in the event of airline bankruptcies, and airlines are motivated to preserve their ability to reorganize quickly and adapt their operations (and legal commitments) to changing financial circumstances. The bankruptcy of an airline can have significant business and legal implications for any air- port that it serves. The following issues often arise: • Will the airline accept or reject its lease, and when must it make its election? • Can the airport operator reassign gates? • What financial losses will the airport operator or other carriers be forced to absorb? • Does the airport operator have adequate security for the airline’s pre-petition debt? • Will the airline properly remit the PFCs it has collected? Also, the impact of airline bankruptcies can vary widely from airport to airport and airline to airline depending on the nature of the market it serves. The following issues often arise: • Is the airport one of the bankrupt airline’s hubs or is the airline serving an O&D market? • Will the airline seek to alter its local operations significantly? (Is it downsizing?) • What kind of Agreement is in effect? (Is it a compensatory or residual Agreement?) The ability to collar the risks of bankruptcy through Agreements is limited because of the often preemptive effect of federal bankruptcy law. The potential financial and operational consequences of airline bankruptcies are beyond the scope of this study. Bankruptcy law is highly technical and specialized, the rules applicable to airline bankruptcies are not all well settled, and both airport and airline negotiators should seek counsel on these matters as they consider alternative forms of Agreements. TRB has recently published a useful and detailed discussion of many of these issues. See ACRP Legal Research Digest 6: The Impact of Airline Bankruptcies on Airports (Transportation Research Board 2009). 15.3 Consortiums In recent years, the industry has experimented with various organizations and structures for providing services to both airports and airlines. One of these structures is the development of consortiums. Generally, consortiums are considered in certain operating situations because it is believed that this structure is more efficient and less costly than other, more traditional approaches (e.g., airport staff, airport contracting). Other potential advantages include the abil- ity to maintain consistent standards, provide opportunity to consolidate contracts, provide flex- ibility and the ability to respond quickly, and provide a local single point of contact for common operating and maintenance functions. For example, consortiums are being considered for oper- ating in-line explosive detection system baggage handling systems, airline equipment, facilities, service contracts, and fuel systems. Consortiums are formalized legal entities that are registered and licensed with the govern- ment. A consortium will have a defined scope and purpose; have two or more airline members; be a decision making structure; have the ability to enter into contracts; and have the ability to budget, make expenditures, and allocate and collect funds. There will be a formal legal structure identified that provides for participation of both the airlines and the airport operator. Impor- tant characteristics of a consortium are leadership, clear scope definition, and sufficient capital- ization and cash management strategies. 90 Airport/Airline Agreements—Practices and Characteristics

With greater frequency, airlines and airport operators are discussing the concept of consor- tiums at airports. The airport operator must consider the impacts to staffing at the airport; the perception of control over day-to-day operations at the airport; the organized labor contract(s) in place at the airport; and the cost impact of a consortium versus airport staff or an outside airport contract to provide selected services. As interest in consortiums increases over the coming years, it will be important for both the airlines and the airport operators to fully discuss, evaluate, and analyze the advantages and disadvantages of the consortium approach before implementation. 15.4 Emergence of Specialty Carrier Business Models During the 1990s, the LCC business model began taking hold in the airline industry. Airports where LCC initiated service for the first time experienced accelerated passenger growth as a new segment of demand for air travel was being created. Throughout the 1990s and into the current decade, LCCs continued to expand their share of the overall airline market, and it has become evident that this business model is here to stay. LCCs typically offer high frequency service and strive for comparatively higher rates of use of airport facilities; they often seek business terms that are tailored to accommodate their business model. Over the last several years, a “specialty” carrier business model has emerged and has been find- ing its way onto the airline industry landscape. Specialty carriers (e.g., Allegiant Air, Sun Country Airlines) have been offering low-fare, low frequency service geared toward leisure passengers from smaller O&D markets into major destination/vacation markets (e.g., Orlando, Las Vegas, Cancun). This air service is generally offered on larger narrow-body aircraft, although the frequency of ser- vice is often less than daily given the level of demand at the smaller O&D markets. These carriers generally have a relatively high level of operations at their key focus destination airports (to which they fly passengers from across the nation), but they will often have a relatively small presence at many of their origin markets, where they may not even provide daily service. This means that the traditional business arrangements between legacy carriers offering frequent service to their hubs and airport operators may not work well for specialty carriers from either an operational or a financial standpoint. FAA Grant Assurance 22 and the 1996 Rates and Charges Policy prohibit any “unjust” discrim- ination between aeronautical users. That being said, specialty carriers have successfully made the case at some airports that a carrier operating small aircraft on a high frequency basis and a second carrier operating large aircraft on a low frequency basis are not similarly situated because they make different use of and have different impacts on the airport and, therefore, that they can qualify for a “just” difference in airport rates and charges. The specifics of the market and the airlines serving that market are key drivers in the formulation of reasonable business deals. Therefore, it is impor- tant for all parties to understand the market and the varying carrier business models to assist in determining the types of business arrangements that work best for that particular market. 15.5 Air Service Incentive Programs From time-to-time, airport operators may choose to offer financial incentives to incumbent or new entrant airlines to provide new air service. These are commonly referred to as air ser- vice incentive programs. It is important to understand that there are certain legal restrictions on the types of incentives that an airport operator can offer. An air service incentive program must be consistent with the FAA’s Sponsor Grant Assurances, the FAA Rates and Charges Policy, and Potential Future Provisions and Issues 91

the FAA Revenue Use Policy. Direct subsidy payments to airlines are forbidden; however, lim- ited waivers of airport fees may be allowed if they are as follows: • Temporary • Available to all qualifying airlines on a non-discriminatory basis • For “new airline service” • Not paid for (through offsetting increases in other fees) by the other airlines serving the mar- ket and not participating in the air service incentive program Given that air service incentive programs must be temporary and generally do not represent a “sustainable” business arrangement, they are often established as temporary policies by airport operators rather than formalized in Agreements. 92 Airport/Airline Agreements—Practices and Characteristics