Airport/Airline Agreements—Practices and Characteristics (2010) / Chapter Skim
Currently Skimming:
Pages 15-48
The Chapter Skim interface presents what we've algorithmically identified as the most significant single chunk of text within every page in the chapter.
Select key terms on the right to highlight them within pages of the chapter.
From page 16... ...
The general objective in negotiating Agreements is to develop a working relationship between the airport operator and the airlines as business partners, which ultimately will help each party achieve their respective goals and objectives. It is important to realize that compromise is part of this process for both parties; therefore, it is critical for each party to understand and prioritize its goals and objectives before entering into negotiations.
|
From page 17... ...
Airline Process Airline/Airport Interaction Airport Processes M o n t h R e v i e w E x i s t i n g A g r e e m e n t A s s e s s P o l i t i c a l L a n d s c a p e & A i r l i n e P a r t i c i p a n t s E s t a b l i s h N e g o t i a t i n g C o m m i t t e e D e v e l o p A A A C G o a l s & O b j e c t i v e s N e g o t i a t i n g C o m m i t t e e B u s i n e s s D e a l R e v i e w R e v i e w A g r e e m e n t D o c u m e n t E x e c u t e A g r e e m e n t R e v i e w E x i s t i n g A g r e e m e n t E s t a b l i s h N e g o t i a t i n g C o m m i t t e e D e v e l o p A i r p o r t G o a l s & O b j e c t i v e s A s s e s s P a r t i c u l a r S t r e n g t h s a n d W e a k n e s s e s E v a l u a t e C I P & L e g a l / F i n a n c i a l / O p e r a t i o n a l A i r l i n e R a t e s & C h a r g e s A n a l y s e s D e v e l o p / R e v i s e T e r m S h e e t A i r p o r t B u s i n e s s D e a l R e v i e w D r a f t A g r e e m e n t D o c u m e n t R e v i e w A g r e e m e n t D o c u m e n t D i s t r i b u t e E x e c u t a b l e D o c u m e n t s 1 2 3 4 5 Kick-off Meeting - High Level Goal Discussion 6 7 8 9 10 11 12 Monthly (or more frequent if needed) Meetings on Business Deal Terms N E G O T I A T I O N P R O C E S S P H A S E 1 13 Reach Agreement on Business Deal 14 15 16 17 Monthly (or more frequent if needed)
|
From page 18... ...
members will be designated by that committee to take the lead in organizing the negotiation effort on behalf of the airlines. This individual is generally designated as the "Airline Chairperson" and this selection can be determined based on several factors including, but not limited to, airport market share, overall experience, current workload, or general familiarity with the airport operator's issues and staff.
|
From page 19... ...
Step 2: Establish a Negotiating Committee Once the Airline Chairperson has assessed the various airport and airline factors that are expected to impact the upcoming negotiation, a determination will need to be made on airline representation for the negotiations. Given the effort and time required for a negotiation and the overall number of signatory airlines at certain airports -- not to mention the various workload issues for members of the AAAC at a given time, it may be more practical to designate a subset of the AAAC as the negotiation committee.
|
From page 20... ...
Source: Ricondo & Associates, Inc., May 2009. Prepared by: Ricondo & Associates, Inc., May 2009.
|
From page 21... ...
At this point in the process, the airport operator is responsible for providing the first draft of the Agreement document and controlling and tracking changes after each meeting. It is important for the airlines to review the first draft of the Agreement to confirm that it properly reflects the business deal that was agreed upon during Phase 1 of the negotiations.
|
From page 22... ...
Some examples of key economic drivers and unique airport factors include the following. Please note that this is not an exhaustive list.
|
From page 23... ...
As with the business deal negotiations, the review of the Agreement document may take several iterations before both parties come to agreement. Therefore, a meeting schedule, both internally with the airline negotiating committee and with the airport operator, should be agreed upon in advance.
|
From page 24... ...
Chapter 3 presented the overall process of negotiations; this chapter addresses the preparation, analyses, and development of preferred strategies to assist in the formulation of the business arrangement for the negotiations. This chapter will describe the importance of developing specific goals and objectives; the importance of proper accounting and categorization of airport finances; recognition of the constraints and parameters that a business arrangement must reside within; and development of the specific rates and charges formulas that quantify the business arrangement being considered and negotiated.
|
From page 25... ...
• What is the age of the Agreement that is expiring or being changed? If the airport is coming off an old Agreement, there may be significant changes needed to update the situation.
|
From page 26... ...
For an airport operator, arriving at a list of negotiating objectives is an iterative process. The airport operator should first list its initial objectives, and then consider the issues and negotiating strengths it has to develop an acceptable strategy for the negotiation.
|
From page 27... ...
Wants. Wants refer to all of the other provisions that an airport operator might seek in negotiating a new Agreement.
|
From page 28... ...
Source: Ricondo & Associates, Inc., May 2009. Prepared by: Ricondo & Associates, Inc., May 2009.
|
From page 29... ...
ing structure should maintain and categorize all of the airport's revenues, expenses (operating and non-operating) , debt service, fund deposit requirements, and any other financial obligations into a formal group of cost centers for accounting and rate-making purposes.
|
From page 30... ...
in the terminal would be assigned to the terminal cost center, and their support facilities may be assigned to a non-aviation cost center. In summary, the identification and formalization of an airport's revenue-producing cost centers must provide for the transparent assignments and allocations of all accounting transactions in the airport's (or airport system's)
|
From page 31... ...
Airfield/Apron Exp/Rev. are basis of landing and apron fees Airfield/Apron Terminal Exp/Rev.
|
From page 32... ...
Source: Ricondo & Associates, Inc., May 2009. Prepared by: Ricondo & Associates, Inc., May 2009.
|
From page 33... ...
fee rate. Terminal Space identifies the breakdown of terminal space by functional area (e.g., ticket counter, holdroom, baggage claim, etc.)
|
From page 34... ...
Common Use Premises Ticket Offices & Bag Aircraft Hold- Jet Baggage Counters Operations Make-up Aprons rooms Bridges Claim C C n/a n/a n/a C C n/aC n/aC C A A C C A A C C A A A A A A A C C C C A AA C C n/a n/a n/a n/a AA n/a n/a n/a n/a n/a n/a n/a n/a n/a A C C n/an/a n/a n/a n/a n/a n/a n/a n/a A A A n/aAA A C n/a n/a n/a n/a n/a n/a C n/a n/a C n/a n/a A n/a A - AIRLINE C - AIRPORT OPERATOR 1AIRLINE shall be responsible for any light fixtures installed by AIRLINE. 2AIRLINE shall be responsible for any electrical fixtures or services installed by AIRLINE.
|
From page 35... ...
The focus of this chapter is on the terms and conditions of Agreements. Over time, many airports and airlines have found it desirable to enter into Agreements that contain mutual commitments and specify key aspects of their relationships (such as the rules governing airport rate setting and the use of airport facilities)
|
From page 36... ...
We focus on the default rules of four key issues: (1) rates and charges, (2)
|
From page 37... ...
that even in the absence of an Agreement, they had a legal right to share in the airport's nonaeronautical (concession) revenues.
|
From page 38... ...
A third controversial issue is whether airport sponsors can impose rates that are designed to bring the demand for the use of congested airport facilities into alignment with their capacity without an Agreement.
|
From page 39... ...
discriminatory") are, however, inherently elastic, and the precise limits on the rate-setting powers of airport sponsors will in many respects remain subject to case-by-case adjudication.
|
From page 40... ...
The Agreement or the rate ordinance is a fundamental element of the business arrangement between an airport operator and its tenants. As such, it governs the way airports generate revenue and implement their CIPs.
|
From page 41... ...
have found that municipal default rates are well below those for corporate bonds. In fact Fitch's 2003 default study found that the cumulative default rate for municipal bonds issued between 1979 and 1997 equaled 0.84 percent.
|
From page 42... ...
and the covenants and limitations the airport operator agrees to regarding the setting of rates and charges (rate covenant) and the issuance of additional debt.
|
From page 43... ...
From the investor's point of view, the residual methodology provides a strong assurance of revenues, as costs are allocated to the airlines based on level of use. Thus, should one airline reduce service or leave a market, the costs are reallocated to the remaining airlines.
|
From page 44... ...
falter. Compensatory approaches are favored at airports that are largely oriented to serving demand created by the underlying market and less reliant on any one airline.
|
From page 45... ...
6.4 Gate Assignments and Usage Investors also consider the gate usage provisions of an Agreement to determine the efficiency of the terminal facilities, the ability of the airport to accommodate demand from the airlines, the potential need for capital expenditures to expand facilities, and the financial risk the airport operator faces regarding underused or unused gates in the event an airline reduces or eliminates service. The deregulation of the industry and the advent of the hub and spoke network raised awareness of the importance of the assignment of airport gates.
|
From page 46... ...
strong MII provisions, from the airlines' standpoint, as the airlines provide the financial backstop to the airport's operations. A strong MII may limit the airport operator from taking on debt in certain circumstances, as the need for airline approval of projects could hinder the ability of the airport operator to implement certain capital improvements.
|
From page 47... ...
contained in the lease. As in a straight assumption, the debtor or the third party must cure all defaults and assure future performance.22 Use of this mechanism may result in an auction process, as the bankruptcy code allows other entities to enter counteroffers to ensure that an assignment attains the maximum resources possible to repay the bankrupt entity's debt.23 Such a process occurred in American Trans Air's (ATA)
|
From page 48... ...
Investment Community Concerns and Issues 51 Source: Ricondo & Associates, Inc., September 2009. Prepared by: Ricondo & Associates, Inc., September 2009.
|
Key Terms
This material may be derived from roughly machine-read images, and so is provided only to facilitate research.
More
information on Chapter Skim is available.