Airport/Airline Agreements—Practices and Characteristics (2010) / Chapter Skim
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Pages 49-80
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From page 50... ...
7.1 Background In the early years of formal agreements between airport operators and airlines, the vast majority of Agreements were long term, often running concurrent with the term of any outstanding bonds. They were also predominantly residual in nature to ensure that bond payments were essentially guaranteed by the air carriers.
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From page 51... ...
airline tenants and the level of uncommitted or unencumbered cash that an airport operator has at its disposal. Impacts to both airport operators and airlines are discussed in the following sections: 7.2 Impact on and Importance to Airport Operators Airports can be complex businesses that must financially stand on their own and require significant amounts of capital investment in infrastructure.
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From page 52... ...
Alternative funding treatments in airline agreements may include the following: • An annual amount included as a line item in the budget to fund the accounts • Funding from debt service coverage collected on general airport revenue bond debt service payments • Funding from non-airline revenue sources (e.g., parking revenue) • Replenishment through rates for actual amounts expended each year • Retention of all revenue in the airport's "bottom" fund, often called the general purpose fund Funding ceilings may also be treated in different manners: Specific annual amounts agreed to in the airline agreement Replenishment of expenditures until the fund balance reaches a specified maximum balance No limit or ceiling specified There are also potential different methods of identifying these funds and their uses: • Discretionary and surplus funds might not have any limit on use.
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From page 53... ...
8.1 Background Capital project control and consultation is typically an issue that will surface in most Agreement negotiations between airlines and airport operators. Some Agreements address this issue through an MII provision.
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project control and consultation. These provisions vary widely from airport to airport depending on the individual situation.
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8.3 Impact on and Importance to Airlines The primary importance to airlines regarding MII provisions is the ability to have some controls over capital spending at airports. All things considered, airlines need to achieve long-run profitability in an extremely competitive and dynamic industry to have a sustainable operation.
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From page 56... ...
MII Thresholds MII Thresholds should be set strategically based on the market share specifics of the market: • Double-barrel -- a certain number of airlines representing a certain amount of activity threshold must be met (e.g., 50 percent of airlines in number representing 60 percent of landed weight)
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From page 57... ...
8.5 Linkages to Other Agreement Provisions • Cost centers -- how capital projects are linked to cost centers for airline rates and charges (see Section 4.3)
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From page 58... ...
9.1 Background The leasing and use of terminal resources has always been a critical element of the business and operating relationship between airlines and airport operators. Years ago, it was more commonplace for an airline to lease more terminal space than it may have needed for its actual operation, because this gave an impression to the traveling public of the airline being larger and more successful than its competitors.
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From page 59... ...
In October 1999, responding to concerns that new entrant airlines were having difficulty gaining access to critical facilities, particularly at certain heavily used airports, the U.S. DOT issued a report titled "Airport Business Practices and Their Impact on Airline Competition." This report provides information to airport operators on airport business and leasing practices that may enhance opportunities for airline access.
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that airline is not maintaining a minimum amount of activity on a gate ("minimum use" requirements)
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From page 61... ...
10.1 Background Airlines began executing long-term Agreements during the era when the airlines were subject to regulation by the Civil Aeronautics Board. During that same period, airport operators first gained access to the municipal bond market as a method to fund capital improvements.
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an airport could have little, if any, affect on making a decision to cease operations and vacate its space at the airport. The departing airline will either seek to sublease its space or continue with lease payments even though it no longer serves the market.
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From page 63... ...
the signatory rates, the airport operator's objective will be to obtain the largest commitment it can reasonably expect from the requesting airline. 10.4 Treatment of All-Cargo Airlines Because all-cargo airlines do not have a need for space in an airport terminal building, they may not execute the same Agreement as the commercial passenger airlines that are limited to carrying belly-cargo.
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shared use is being required for a temporary period) and may provide a level of control over airport expenditures that impact its rates.
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From page 65... ...
11.1 Terminal Rental Rate Divisors and Methodologies There are a number of methodologies employed at airports to calculate terminal rental rates, each with their own set of reasons and implications pertaining to their use. In general, the terminal rental rate methodology used revolves around the following considerations: • Balancing airport/airline risks and rewards • Balancing overall airline costs versus the airport's financial performance • Maximizing the use of terminal space • Maintaining level of cost recovery Generally, these various factors are quantified in the three primary approaches to establishing terminal rental rates as follows: • Compensatory rental rates • Commercial compensatory rental rates • Residual rental rates To best understand the various terminal rate-setting methodologies and their implications, it is best to first understand the different rental rate divisors (measured in terms of square feet)
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From page 66... ...
Terminal Rental Rate Methodologies and Considerations 71 make-up areas, operations areas, hold rooms, and aircraft gates. In many cases, the ticket counter queuing area in front of the airline ticket counters is also included within the airline's leased areas.
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From page 67... ...
approach, the airlines, concessionaires, and other tenants are allocated their pro-rata share of the costs of the public or common areas and administrative areas. With a commercial compensatory rental rate methodology, a rentable space divisor is used to calculate the average terminal rate per square foot.27 By using a rentable space divisor, total costs are effectively spread across only the airline, concessions, and other rentable space.
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From page 68... ...
gle equalized rate for all airlines is generally calculated by totaling operating expenses, capital costs, and other terminal costs associated with all terminals or concourses and dividing by the appropriate square footage divisor for all terminals or concourses. As a result, all operating and maintenance costs, as well as capital costs, are spread equally to all airlines.
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costs. For example, an airport operator that originally constructed a unit terminal building in 1980 may decide that to accommodate anticipated growth in passengers it now needs to construct a new additional unit terminal.
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11.3 Weighted Rental Rates At its most basic level, airport operators simply charge an airline based on the average rental rate per square foot across all types of airline space. In other words, the airlines are charged the same rate per square foot, regardless of the type of space they occupy (i.e., ticket counter, baggage claim, holdrooms, bag makeup)
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From page 71... ...
12.1 Background Joint use and common use facilities refer to facilities that are used by more than one airline for a similar purpose. Because more than one tenant uses these facilities the cost of the facilities should not be born by a single airline.
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Impacts on both airport operators and airlines are discussed in the following sections; however, the issue is somewhat philosophical in nature, and there is not necessarily a right or wrong approach. 12.2 Impact on and Importance to Airport Operators Airport operators will recover the full cost of the joint use facilities so the importance to an airport operator generally centers on the cost for new entrants that want to test the market.
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• 90/10 formula, wherein 90 percent of the total cost of the facilities is prorated among all the airlines based on their percentage of enplaned passengers. The remaining 10 percent of the cost of the facility is shared equally amongst the number of airlines using the facility.
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From page 74... ...
13.1 Background Historically, an airline was required to execute an Agreement to be considered a signatory airline at that airport. Then, as "network" or "legacy" airlines began to develop relationships with other airlines in the form of code-sharing, some Agreements allowed for these code-sharing airlines to receive the same rights and privileges as the airline executing the Agreement.
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rights and privileges. While an airport operator that has an airport residual Agreement with its signatory airlines would not experience any financial risk, there is still the distribution of the revenue requirement through the airline parties that should be fair and equitable.
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13.5 Linkages to Other Agreement Provisions • Capital project control and consultation -- whether an affiliate has the right to participate in MII discussions (see Chapter 8)
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14.1 Background By their nature, airports are capital intensive enterprises. Airport Council International–North America's (ACI–NA)
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airport greater security in the near term in the event that a tenant airline fails to meet its financial obligations. Airports can also use these surplus funds to internally finance capital improvements and potentially lower the debt burden passed on to airlines or passengers .
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From page 79... ...
While compensatory/hybrid-based airport operators have assumed a greater financial risk, with the ability to hold significant financial resources to mute the effects of underlying economic volatility, many such airport operators maintain an extraordinary coverage provision in their Agreements to protect against an unexpected decline in their financial position. These provisions allow an airport operator to recover resources from the airlines sufficient to meet the rate covenant contained in their bond ordinance/indenture through a special adjustment to their rates and charges, providing bondholders assurance of debt service payments in periods of significant financial distress.
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From page 80... ...
Additional financial liquidity is extremely dependent on factors such as the underlying airport market, its planned uses for such liquidity, and the type of rate-making methodology. Airport operators with a residual-type rate-making approach generally have less flexibility in creating additional liquidity and tend to have less unrestricted cash on their balance sheet and a coverage ratio nearer the rate covenant compared with a compensatory/hybrid-based airport.
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