Rethinking Airport Parking Facilities to Protect and Enhance Non-Aeronautical Revenues (2021)

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75 Airport Parking Management Models Together with Chapter 7, this chapter addresses the question, “What strategies and technolo- gies are available today to offset the revenue reductions airports have observed (or anticipate) due to continued growth in the TNC mode share?” A key element in maximizing net parking revenues is managing the operating costs associated with public parking. The operational model an airport employs for its parking facilities can contribute directly to that goal but can also be used to protect against the risk of uncertain future parking revenues. With those goals in mind, this chapter summarizes airport parking management models used in North America. Infor- mation on each model includes a description of the contract structure, potential positive and negative aspects of the structure, and existing examples. This section also describes potential implications of changes in technology and consumer preference on airport parking management strategies. Potential positive and negative aspects reflect interviews with experienced airport parking operators and airport parking developers, and the professional experience of the research team. Individual names and corporate affilia- tions have been anonymized for confidentiality purposes. Contract types include: • Management agreement, • Lease/Concession agreement, • Fixed price agreement, • Private developer investment, • Valet parking contract, and • Hybrid contracts. Another option that is used by several U.S. airports, is to self-operate their parking facili- ties using airport staff. Under this type of arrangement, the airport owner or operator retains all revenues but pays all capital and operating costs. Since all parking staff are employees of the airport operator, their salaries, benefits, and work rules (e.g., grounds for dismissal) are the same as those of other airport employees. As it is not a contract type, self-operation is not discussed in this guidebook, but further information on self-operation is provided in ACRP Report 24: Guidebook for Evaluating Airport Parking Strategies and Supporting Technologies. Of these contract types, U.S. airports predominately choose to employ management agree- ments. As shown on Figure 6-1, a 2017 survey prepared by Airport Council International— North America (ACI-NA) and the International Parking and Mobility Institute (IPMI) indicated that of responding airports, more than 75% use a parking contractor and of those, most use a management agreement. Small-hub U.S. airports are more likely than larger airports to be self- operated, while large-hub U.S. airports are more likely than smaller airports to use management agreements. C H A P T E R 6

Source: Airports Council International-North America and International Parking Institute. Figure 6-1. Parking contract usage by North American airports, 2016.

Airport Parking Management Models 77 6.1 Management Agreement Key characteristics of an airport parking management agreement are as follows: Revenues. The operator collects the revenues generated by the parking facilities and forwards them to the airport. Management Fee. The airport pays the operator a monthly management fee (can be flat fee, an incentive fee based on specified and approved criteria, or a combination of these). Manage- ment fees are frequently scheduled to increase periodically, based on a set percentage or variable factors such as the consumer price index. Reimbursable Expenses. The airport reimburses the operator for specific authorized operat- ing expenses, as documented in an annual operating budget that is most often prepared by the parking operator but is subject to approval by the airport. Such expenses include staff hours at an agreed upon hourly rate stipulated in the contract. Non-Reimbursable Expenses. Management contracts define what expenses may not be reimbursable and must, therefore, be incorporated by the operator into their proposed management fee. Typical non-reimbursable expenses include liability insurance, worker’s compensation insurance, and payroll costs for parking operator management staff not permanently assigned to the airport location (perhaps providing regional or corporate office support). Incentive Management Fees. Management fees can include an incentive fee component, but U.S. tax regulations limit the ability of operators to make profit-based or net operating income (NOI)-driven incentive fees if the facility was financed using tax-exempt bonds. Even if revenue-based or NOI-based incentive fees are excluded, airport parking contracts can include incentive fees based on non-revenue items such as: – Customer satisfaction survey results; – “Mystery Shopper” scores; – Frequency of customer complaints; – Accuracy and timeliness of operator reporting; and – Parking volume growth, often in comparison to a pre-established threshold, such as annual passenger growth. Reporting. Management agreements usually incorporate stringent operator monthly reporting obligations, including: – Monthly profit and loss statements; – Daily revenue, volume, and occupancy summary reports; and – Annual operator financial statements certified by the operator’s chief financial officer or certified public accountant. Most major airport parking operators utilize robust online reporting systems that allow authorized airport personnel to view monthly reports and real-time parking activity reports through online reporting portals. Operator Ancillary Line-Item Profits. Some airport parking management agreements pro- hibit an operator from earning profits on ancillary services, such as self-insured, retention- based liability insurance programs, where the operator charges the client market-based rates for company-funded risk coverage but pays most claims from its own funds. The parking operator in this case is responsible for covering risk management losses above a specified client deductible but below the operator’s true insurance deductible. For example, the client deductible may be $5,000 for certain kinds of losses, but the operator’s third- party insurance covers losses above $250,000 only. The operator must fund losses between the stated $5,000 and $250,000 from the companywide risk management pool. The oper- ator charges the client for coverage based on the client deductible, but its internal costs are lower, based on coverage procured for losses above the higher threshold only. Thus, if all losses are below the client deductible, risk management can be a profit center for the

78 Rethinking Airport Parking Facilities to Protect and Enhance Non-Aeronautical Revenue parking operator. Ancillary profit centers should be spelled out in a management agreement, providing transparency in terms of operator profit. Flexibility. Management agreements can provide maximum con- tract flexibility for the airport and for the operator (as compared to lease or concession agreements). For example, if the airport and operator believe the addition or reduction of personnel is appro- priate and the deal structure is a standard management agreement, expense changes can often be promptly implemented. This matter can be less assured with other contract types. Competition Provisions. Management agreements typically pro- hibit the operator from operating or having a financial interest in the operation of a public parking facility that would attract/serve airport passengers or employees. Cancellation Provisions. Most airport management agreements include cancellation clauses, allowing the airport to exit from the contract with cause (e.g., parking company’s insolvency or impro- priety, operator’s failure to correct deficiencies after notice from the airport). Capital Expenditures. Airport parking management agreements often require reimbursable capital expenditure contributions on the part of the operator. Examples of such improvements that an operator may fund include: – Parking access and revenue control equipment; – APGS; and – Airport parking shuttles. Capital improvements are frequently reimbursed to the parking operator over the term of the management agreement or, if the amortization period is shorter than the agree- ment term, the useful life of the equipment purchased. If an operator does make a capital contribution for equipment or other improvements, and if the management agreement is cancelled prematurely, the agreement generally stipulates that the unamortized portion of the improvement is paid back to the operator as a lump sum. 6.1.1 Management Agreement Strengths Strengths of management agreements for airport parking operations include: • Airport maintains a high level of involvement in operations and flexibility in contract obligations. • Operator’s location-specific financial results are fully visible to the airport. • Airport has full line-item access to audit operator’s reported expenses, including payroll time sheets (to ensure that the approved and appropriate payroll hours are charged to the location). • Operator is likely to generate a profit. • Financial risk for operator is low if they submit a responsible bid. • Financial and service quality risk for airport is low if operator is selected based on proper criteria. • Contract can be structured such that all operator profits are included in the management fee, facilitating an “apples to apples” comparison of proposed financial results. • Risk can be avoided by operators faced with the uncertain future of airport parking demand and revenues because the long-term impact of TNCs and other factors on parking demand is unknown. • Management agreements may be structured such that daily revenue deposits are made to the airport’s bank account while expenses are reimbursed to the parking operator as part of the Capital improvement requirements have the potential to complicate the evaluation of competitive proposals for management agreements. Such requirements may result in uneven proposal submissions as operators may submit bids that make varying assumptions on the type or magnitude of the capital investment. For example, one bidder may propose certain parking and revenue control equipment and features, while another bidder may propose a different solution. To mitigate this risk, airport parking requests for proposals (RFPs) for management agreements may specify that the operator must contribute an amount towards capital improvement “up to $__” without specifying the type of investment, enabling the airport to evaluate proposals on an even playing field.

Airport Parking Management Models 79 monthly management reporting process. Thus, the airport may benefit from the float as it receives the revenues daily but reimburses the parking company 30 days after receipt of the monthly statement. 6.1.2 Management Agreement Weaknesses Weaknesses of management agreements for airport parking operations include: • Management agreements typically require the airport be involved in day-to-day parking operations. The parking operator is the agent for the airport. Thus, the airport must main- tain an administrative organization, including staff with appropriate experience with parking operations, to oversee the parking operator’s performance. • Management agreements tend to be limited in duration requiring periodic re-competition for the contract. • The parking revenue stream to the airport is subject to variations associated with changes in passenger volumes, passenger propensity to park (versus use other access modes), off-airport parking competition, and other factors. Thus, the airport assumes a substantial portion of the risk of potential future revenue reductions. • Daily revenue deposits to the airport, combined with the time between operator payment of expenses and reimbursement by the airport, given the large scale of revenue and expenses associated with airport parking, can create financial stress for the parking operator. The park- ing operator may need to build the cost of money into its management fee if it must wait up to 90 days from the date direct expenses are incurred (such as payment of salaries) until it is reimbursed by the airport. This can be mitigated if the airport provides the operator with an advance payment of a certain duration (e.g., 90 days’ worth) of budgeted operating expenses or includes a management agreement clause that provides the operator with timely reimburse- ment of expenses. • If a flat management fee is the operator’s only compensation, the operator may be less incentivized to generate additional revenue or reduce expenses, as the management fee, which covers profit and overhead, remains constant despite fluctuations in parking activity, gross revenues, and net revenues. 6.1.3 Examples of Airport Parking Management Agreements There are numerous examples of airport parking management agreements. Airports currently using them include: Large-hub airports. Denver International, George Bush Intercontinental/Houston, Minneapolis-St. Paul International, Phoenix Sky Harbor International, and San Diego International airports. Medium-hub airports. Austin-Bergstrom International, Cincinnati/Northern Kentucky International, Houston Hobby, Kansas City International, and Sacramento International airports. Small-hub airports. Boise, Des Moines International, Fresno-Yosemite International, Gerald R. Ford (Grand Rapids) International, and Pensacola International airports. Non-hub airports. Amarillo International, Key West International, and Wilmington International. 6.1.4 Contract Variant: Hourly Billing by Job Classification This variant of the management agreement approach incorporates non-labor expenses and the management fee (including profit) into the hourly rates assigned to each job classifi- cation. In addition to the management agreement strengths described above, hourly billing by

80 Rethinking Airport Parking Facilities to Protect and Enhance Non-Aeronautical Revenue job classification can increase operator responsiveness to requests for additional staff as more billable hours typically provides higher profits, unless additional capital expenditures become necessary. In addition to the management agreement weaknesses described above, hourly billing by job classification can de-incentivize the operator to reduce staffing levels when circumstances justify it. Such contracts may also include operator protections against “non-controllable” factors such as: • Increases in federal, state, and local minimum wages; • Fuel surcharges for shuttle operations; • Capital expense repayment in the event of early contract cancellation; • Reduction in shuttle driver man-hours to below minimum levels, rendering individual shuttle bus or buses unprofitable due to fixed costs not being covered due to lack of utilization; and • Increase in shuttle driver man-hours to above maximum levels, which could require the operator to procure additional buses, possibly impacting profit potential. Such contract structures are not common for parking operations in the United States but they are commonly used for shuttle bus agreements that may be used to support parking operations. John Wayne Airport, Orange County, uses such an agreement for its shuttle buses, and the hourly rate includes amortization of the buses. Los Angeles International Airport uses such an agreement for hourly staff payroll and other operations costs, supplemented by a flat management fee that includes expenses such as management staff payroll. 6.2 Lease/Concession Agreement Key characteristics of an airport parking lease/concession agreement are as follows: Revenues. The operator collects all revenues generated by the parking facilities. Operator Payments. The operator pays “rent” or a “concession fee” to the airport, sometimes based on a fixed amount or as a percentage of revenue, perhaps over a threshold. Timing of Payments. Rent may be paid monthly, annually, or even full-term in advance (as a P3 concession payment.) Expenses. A lease (or concession) agreement differs from the management agreement in that expenses are, unless specified, not reimbursed by the airport to the operator. Capital Expenditures. A lease or concession agreement may include a capital expenditure contribution on the part of the operator, perhaps for parking equipment or other critical improvements. An airport may choose to enter into a parking lease agreement with such a contribution if the airport does not have the funds required to outfit the parking facilities with critical equipment such as updated revenue control equipment, signage, or shuttle buses. 6.2.1 Lease/Concession Agreement Strengths Strengths of lease/concession agreements for airport parking operations include: • These provide a more stable cash flow to the airport, especially under agreements that include minimum guarantees. This reduces risk due to the ebb and flow of revenue resulting from major changes in the economy, business or leisure travel patterns, or evolving modes of transportation such as TNCs, AVs, or other modes, all of which can impact parking revenue. • Revenue stability (or large advance payments) may provide the airport with the value opportunity to secure funding for non-parking infrastructure projects.

Airport Parking Management Models 81 • There is a reduction in costs related to an airport’s internal parking administration organiza- tion. An airport need only review the total parking revenues collected to confirm the revenues retained by the concessionaire, which results in much lower audit requirements than a management agreement where all labor hours and expenses must be audited. • An agreement that includes a percent of revenues component, over and above a base rent payment, enables the airport and the operator to benefit from increases in revenue, while sharing the risk of revenue reductions. 6.2.2 Lease/Concession Agreement Weaknesses Weaknesses of lease/concession agreements for airport parking operations include: • For larger airport parking operations, revenue and expense amounts are so large that very few parking companies have the financial capacity to enter into guaranteed rent arrangements. • Changes in travel patterns or the impact of emerging services, such as TNCs, can introduce uncertainty to a lease negotiation process. The operator may wish to “hedge their bet” by reducing what might be a market-rate based rental to some lower amount. • The airport has reduced ability to control customer experience. Unless stipulated in the contract agreement, the airport has—compared to a management agreement—less ability to control customer service aspects, such as controlling queue lengths at exits (which are impacted by staffing levels) or providing roving parking attendants. The operator is incen- tivized to minimize operating costs as the fees they receive depend solely on the revenues collected, as opposed to a management contractor who is incentivized to provide additional staff. • If parking rates are increased in the middle of the contract, the contractor is rewarded with additional revenue without incurring any additional costs or taking any actions to justify the higher revenues. • The operator may want to control aspects of the operation that impact revenue or expenses, reducing the amount of control the airport can exercise over the operation. This matter can be addressed through an effective contract negotiation, detailing clear boundaries for the airport and the operator. 6.2.3 Examples of Airport Parking Lease/Concession Agreements While not common in the United States, airport parking lease/concession agreements are common in airports throughout the world. Examples of U.S. airport lease/concession agree- ments include: Large-hub airports. Baltimore/Washington International and Honolulu International airports. Medium-hub airports. Epply (Omaha) Airfield and Mineta San Jose International Airport. Small-hub airports. Fargo International, Long Island McArthur, Myrtle Beach International, and St. Pete-Clearwater International airports, and Joe Foss (Sioux Falls) Field. Non-hub airports. Tri-Cities Airport. 6.3 Fixed-Price Agreement A fixed-price agreement is similar to a management agreement in that the airport receives the parking revenue and pays the operator to operate the facilities on behalf of the airport. Other characteristics of such agreements include: Revenues. The operator collects the revenues generated by the parking facilities and forwards them to the airport.

82 Rethinking Airport Parking Facilities to Protect and Enhance Non-Aeronautical Revenue Payments to Operator. The airport pays the operator a fixed monthly amount established during the proposal process. This amount is based on budgeted operating expenses plus a management fee. Expenses. The parking operator pays all expenses and earns its profit within the constraints of the fixed-price payment. Expenses need to be accurately defined in the contract, such that there is clarity as to which entity is responsible for what expenses. Liability for major variable costs, such as snow removal or major facility repairs, must be agreed upon and stated in the contract. The agreement should ensure that the operator is not affected posi- tively or negatively by government-stipulated changes in minimum wage levels and other expenses not under the control of the operator. Liquidated Damages. As the operator has incentives to minimize its expenses, liquidated damage clauses are incorporated into the contract to address items such as missing ticket percentages, failure to maintain and document maintenance of parking facilities, and failure to staff at required levels. If liquidated damages are assessed, the airport reduces the amount of its monthly remittance to the operator based on verified liquidated damage penalties. 6.3.1 Fixed-Price Agreement Strengths Strengths of fixed-price agreements for airport parking operations include: • The airport knows in advance what it will spend on the parking operation over the course of a contract term. • The operator can increase its profit by controlling expenses, but this is not the intention of such a contract. • The operator’s monthly reporting to the airport can be simplified as compared to a typical management agreement, since the airport is not involved in the operator’s day-to-day management of expenses. 6.3.2 Fixed-Price Agreement Weaknesses Weaknesses of fixed-price agreements for airport parking operations include: • Similar to concession agreements, fixed-price contracts may incentivize the operator to spend less on operations, which could affect levels of service provided to the airport and its parking customers. • The operator has no recourse to improve profitability if the operating costs have been mis- judged during the proposal process. Staffing levels would be established in the contract and enforced via liquidated damages clauses. • The operator cannot benefit by implementing revenue-increasing strategies. 6.3.3 Examples of Airport Fixed-Price Agreements Fixed-price parking agreements are uncommon among U.S. airports. The fixed-price contract structure is more commonly used for downtown and other (non-airport) parking facilities that are municipally-owned or controlled. Fort Lauderdale-Hollywood International Airport and John Wayne Airport, Orange County, use such a contract for their self-park operations. 6.4 Private Developer Investment The private developer investment approach allows the airport access to non-airport funds to construct needed infrastructure, pay off existing debts, or other reasons. As each deal is unique to a given airport’s situation, this section describes and highlights the strengths and weaknesses of one example, the garage development at Louis Armstrong New Orleans Inter- national Airport. Other U.S. airports that have employed this method include Gulfport-Biloxi Inter national, Bradley (Hartford) International, and T.F. Green (Providence) State Airport.

Airport Parking Management Models 83 6.4.1 Louis Armstrong New Orleans International Airport Model For its 2001 and 2018 garage construction, Louis Armstrong New Orleans International Airport used a model that allowed it access to non-airport funds. Key elements of the arrange- ment are as follows: • A 501(c)(3) non-profit entity, called Parking Facilities Corporation, was formed for the specific purpose of developing the airport parking facilities. The entity has no private owners. • Tax-exempt bonds were sold to finance construction of the garages in 2001 and for the current project. • The entity executed a ground lease with the New Orleans Aviation Board and makes monthly rent payments for the right to use the land on which the garages are built. • A parking operations joint venture was hired to manage the airport parking facilities on a Qualified Management Agreement basis. U.S. tax regulations stipulate that when tax-exempt bonds are utilized to fund such a project, the company hired to operate the parking facilities can neither share in profits generated by the venture nor can they participate in associated losses. Thus, the operator manages the garages on a flat management fee basis, with initial annual compensation of approximately $400,000. • The operator collects all revenues, pays all expenses, and pays all profits to the airport. 6.4.2 Private Developer Investment Strengths Strengths of the private developer investment model include: • The debt sold to finance the garage development is not on the airport’s balance sheet, which improves the airport’s financial condition. • The entity can implement initiatives with more agility than airport as the entity is not subject to the same level of decision-making regulation as is the airport. • The airport earns all profits from the operation, does not have the debt on its balance sheet, and can negotiate terms that ensure the appropriate level of parker experience. 6.4.3 Private Developer Investment Weaknesses Weaknesses of the private developer investment model include: • If the facilities underperform due to lack of demand or changing conditions and the bonds are downgraded, the 501(c)(3) suffers, and there may be no profits to share with the airport. • Due to the tax-exempt financing used, the parking management company cannot earn a profit-based incentive fee. • The airport has less direct control over the customer experience in its parking facilities. • If the entity operates one parking facility and the airport operates another, the airport may end up competing with the contractor in terms of parking rates and services. 6.5 Valet Parking Contract Airports offering valet parking may elect to use a different contract structure than is used for the rest of the public parking operation. In contracts where the self-park facilities are operated under a management agreement, the valet portion may include a revenue share component that shares the benefit and the risk between the parking operator and the airport. At some airports the valet operation is part of the overall parking management agreement while others use a separate contact for valet parking. At Dallas/Fort Worth International Airport, for example, valet parking is operated under a concession agreement while other facilities are self-operated or using a management agreement.