Airport/Airline Agreements—Practices and Characteristics (2010) / Chapter Skim
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This resource manual (the "Manual") contains the results of the research efforts undertaken by the research team for the ACRP Project 01-07, "Airport/Airline Agreements and Rate Methodologies -- Practices and Characteristics." The introduction chapter explains the intent of the Manual and why this research effort was undertaken, the overall methodology employed, how this Manual should be used by both airport operators and airlines, and the overall organization of the Manual.
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The above questions and statements are frequently heard from both airport operators and airlines. It has been the experience of the research team that many desired outcomes in the very dynamic aviation industry are based, in part, on what others are doing or have already accomplished.
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The primary intent of this Manual is to provide a tool to assist both airport operators and airlines during business arrangement negotiations by describing the range of business relationships between airports and airlines including the underlying rates and charges methodologies, presenting a general negotiation process and schedule, identifying key information for a negotiation, identifying the various issues that typically surface, describing the various alternatives for resolving potential conflicts and issues, and identifying the linkages among these various critical issues. It will be important for airport operators and airlines to learn from and understand what others have incorporated in their respective Agreements, but it will also be important for an airport operator to understand that provisions in any agreement satisfy the needs of that particular airport setting, and are not being negotiated because they are in some other airport operator's agreement.
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In July 2009, the research team conducted a workshop to obtain feedback from the industry regarding the draft resource manual. Participants at this workshop included airport finance directors, airport executive directors, and airline property representatives.
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This chapter describes the purpose of an Agreement. Also discussed is whether an Agreement is actually "needed," and what alternative arrangements are available for airport operators and airlines to consider.
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While an Agreement may be desired by certain airport operators and airlines as a method of entering into a business relationship, it is important to recognize that Agreements are not required by law. In the absence of an Agreement, airports can establish by ordinance, resolution, tariff, regulation or other unilateral action the local rules that will govern the airlines' use of their airport facilities.
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in a bond resolution that must be addressed and satisfied, that when circumstances may warrant that an airport's ability to satisfy the rate covenant requirement of providing for a minimum of 1.25 times annual debt service, the airport operator will primarily seek to recover the shortfall necessary from the airlines. In that circumstance, the "risk" is then borne by the airlines, rather than the airport operator.
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"majority-in-interest" (MII) provision.
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2.3.2 Compensatory Compensatory rate making generally represents a "cost-based" approach, in that an airline pays for only the cost of facilities used or leased at a specific airport. This is different from the residual rate-making approach, where the airlines assume the risk and are responsible for guaranteeing that the airport operates on a financial break-even basis.
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Because they do not bear the financial risk, the airlines generally have limited control over an airport operator's capital development under a pure compensatory business arrangement. The airlines may have some ability to review or vote on certain development occurring in the airline cost centers such as the terminal, airfield, and apron.
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• Application of net revenue to the airlines can be based on several factors including, but not limited to, enplaned passengers (where only passenger carriers are applicable) , amount of rates and charges paid, and direct credit against specified cost centers.
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2.3.4 Settlement Because actual financial and aviation activity will differ from that budgeted or estimated, an Agreement generally includes a provision for a year-end financial settlement between the airport operator and signatory airlines. This can also be more commonly referred to as "true-up." Essentially, a settlement consists of comparing the budgeted rates and charges calculations for a particular fiscal year with the final year-end actual rates and charges for that same fiscal year.
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However, with deregulation and the ease of entry for airlines into markets, the investment community gradually began to recognize that the true credit security for an airport's revenue bond debt was the underlying strength of an airport's market and its ability to continue to support growth in passenger traffic, rather than the Agreement in place at that particular airport. The following quote from Standard & Poor's Rating Service supports this point: While use agreements may provide an additional level of comfort if a particular airline ceases to operate or alters its routing structure, the inherent demand in the air traffic market remains the ultimate security for the bondholder.
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