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Infraread issue 11 | US 16 Apr 2018 Making America's airports great again: a review of the current models of US airport development projects

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It is clear from the current level of design and construction activity at US airports that development and upgrade projects are being taken forward at an unprecedented rate. Given that not one US airport was included in the list of the world's top 10 airports in the 2017 Skytrax World Airport Awards, it is no surprise that significant improvements are seen as necessary by airports. In fact, the first US airport to make Skytrax's list is Cincinnati/Northern Kentucky International Airport at number 26, followed by Denver International at number 28. In total, only 14 US airports qualified for the list's top 100 spots. 

Options available to airports desiring to implement improvement projects include:

(a) the use of contracts, including the use of design-bid-build or design-build procurements, which may also be coupled with long-term operation, maintenance and concession management contracts;

(b) the use of public-private partnerships (P3); 

(c) airport terminal leases; and

(d) airport privatization. 

In approaching improvement projects, airports must weigh the various advantages and disadvantages of each of these options and consider factors including cost-effectiveness, risk transfer to the private sector and the availability of public and private financing. This article analyzes the features of different models and discusses them in the light of recent airport projects in the US. 

This article draws on the experience of Ashurst attorneys who have been involved with and are currently engaged on a number of airport development and improvement projects in the US.  These projects include the Denver Great Hall Project, the Newark Terminal A Redevelopment Project, the Kansas City Airport Project and two projects at Los Angeles International Airport: the construction of an automated people-mover facility and a consolidated rent-a-car center. 

Airport infrastructure is also on the national agenda and features as a key area for infrastructure upgrade in the White House's "Legislative Outline for Rebuilding Infrastructure in America" released in February 2018 (the Infrastructure Principles). This article also discusses these principles and considers current proposals to privatize US air traffic control.  

Public-Private Partnership 

The popularity of P3s in all sectors of infrastructure is on the rise in the US. A P3 is a partnership between a government agency and a private sector entity. The term P3 means different things to different people but typically involves the private sector agreeing to design, build and finance a facility and to then operate and maintain the facility for a multi-decade term.  P3 projects at airports are typically paid for either by milestone payments and availability payments from the public sector owner throughout the term of the contract, or by permitting the private sector entity to take a share of revenues generated at the airport (such as airline gate rental or retail concession revenues). In some cases a combination of public sector payments and revenue-sharing may be used. In any event, the private sector entity will be expected to finance the initial capital expenditure on the project and to recover this through revenue received during the term of the project. 

On the one hand, P3s can be attractive to the public sector because they transfer the design and construction risk to the private sector and therefore – given the incentives for the private sector to finish on time – have a good record of completing on time and on budget. They can also be attractive to the public sector as the initial financing for the project is raised by the private sector and will not require day-one debt issuance by the public sector owner. In addition, a P3 will include an obligation to undertake the long-term operation and maintenance of the facility and therefore incentivizes the private sector developer to ensure that the lifetime cost and operational challenges of a facility are considered (and priced) at the time of design and construction. 

On the other hand, a key disadvantage of P3s from the public sector perspective is that the risk transfer to the private sector comes at a cost, in terms of increased contingency costs and increased financing costs, which may not outweigh the benefits of using a P3 model for some projects.

LaGuardia Airport is operated by the Port Authority of New York and New Jersey (Port Authority) and is the third busiest airport serving New York City, and the twentieth busiest in the US. In 2016, work began at LaGuardia Airport on the largest P3 at a US airport to date. LaGuardia Gateway Partners – a consortium company comprising experts in the fields of airport design, construction and operation – will design, build, manage and maintain LaGuardia's new Terminal B under a 35-year lease agreement with the Port Authority under which LaGuardia Gateway Partners will have operational control of the new terminal (including control of airline and concession revenues generated from the terminal). A key reason that the Port Authority decided to use a P3 structure for this project was that the construction work needed to be carried out in a central part of an operating airport, and it was decided that this risk was best handled by the transfer of construction and operations risk to the private sector both during and after the construction period. The new terminal will be a 1,300,000 square foot building with 35 gates and is projected to cost US$4 billion, with US$2.4 billion being financed through the issuance of special facilities bonds. Equity funding will also be provided by the private sector sponsors. The consortium will pay the Port Authority an annual rent and revenue share, and debt is expected to be repaid through remaining revenues, passenger facility charges (PFC) and funding from the Airport Improvement Program (AIP), which is administered by the federal government to allow public airports access to funds to undertake development and improvement projects. 

Denver International Airport in Colorado is the largest airport in the US by total land area and, as of 2016, the eighteenth busiest airport in the world and the sixth busiest in the US by passenger traffic. In December 2017, Denver International Airport reached financial close on its renovation project for the Jeppesen Terminal's Great Hall. The US$650 million renovation is being undertaken through a P3 model and will include the design, construction, financing, operation and maintenance of certain areas within the terminal. It is interesting to note that this project is limited to the consolidation of airline ticket counters, the consolidation and relocation of Transportation Security Administration screening areas, the modification of the baggage handling system and the redesign of the shopping, dining and meeter/greeter areas. The Denver Great Hall Project is particularly interesting because the concession agreement includes both an availability-based payment arrangement and a revenue-share feature. Under the airport's bond ordinance program the availability-based payments are funded from the airport's revenue fund at a junior lien level, which allows for senior debt to be paid out at a higher priority than the availability-based payments. 

The automated people mover (APM) project at Los Angeles International Airport, which is the largest and busiest airport in the US, is set for financial close this spring. The APM will be a 2¼-mile system which will carry up to 10,000 passengers per hour and connect the airport terminal to the Metro light-rail system and other transit services. This project will also be the first use of a P3 "design-build-operate-finance-maintain" model to design, construct and operate an APM in the US. 

Following on from the APM project, the consolidated rent-a-car center (CONRAC) project is the second P3 request for proposals to be released by Los Angeles World Airports (LAWA) as part of its US$5.5 billion Landside Access Modernization Program at Los Angeles International Airport. CONRAC will house 23 rental car companies in one facility which will be connected to the airport terminals by the APM. The winning bidder will enter into a 29-year contract with LAWA, comprising a four-year design and construction phase followed by a 25-year operational phase. LAWA is expected to make milestone payments to the developer during the design and construction phase, and availability payments during the operations period. 

Contract options

While many of the latest airport projects are looking to P3 models, a significant number of airport authorities have chosen instead to use a design-build model, where the private entity is engaged only to design and build the facility, and the airport then relies on its own revenues and public sources of funding to implement improvements. A notable example is Chicago Midway International Airport, following an earlier unsuccessful attempt at privatization (see further below). First announced in 2015, ground broke in January 2018 on a new US$104 million facility at the airport, which is the second-largest metropolitan airport in Chicago. The project includes an 80,000 square foot security hall, which is expected to be completed in late 2019 or early 2020, and a US$75 million renovation of the airport's dining options. Additional parking and an improved pedway are also on the airport's agenda. These improvements will be funded entirely by airport operations and federal government grants, and Chicago Midway International Airport will maintain full operational control of the facilities.

Newark Liberty International Airport is operated by the Port Authority and is one of three major airports servicing New York City. In 2015, based on passenger numbers, Newark ranked as the second busiest airport in the New York/New Jersey metropolitan area and the fourteenth busiest in the US. The existing Terminal A is the oldest terminal at Newark (having opened in 1973) and, despite two major upgrades in 1995 and 2004, is approaching the end of its useful service life. The US$2.3 billion Terminal One Redevelopment Program includes the following elements:

  • replacement of Terminal A with a new approximately 1,000,000 square foot, 33-gate common-use domestic terminal building, to be called Terminal One, and the construction of a pedestrian bridge providing direct access from the EWR AirTrain (the monorail service connecting the various airport terminal buildings) and a parking garage;
  •  a new aeronautical taxi-lane network and apron serving the new terminal;
  • new frontage roads and bridges, utilities and site work that will serve the new terminal; and
  • a parking garage and associated toll plazas serving the new terminal.

Unlike the redevelopment of Terminal B at LaGuardia, the new Terminal One at Newark will be located on what is essentially an undeveloped site adjacent to the existing Terminal A. Therefore, all of the work for the new terminal can be completed with minimal interference with existing operations and, accordingly, does not present the same challenges and risks as the redevelopment of LaGuardia Terminal B (where the key risk involved managing the interface of the new terminal construction with the continued operation of the existing terminal). After considering all the options, the Port Authority determined that the circumstances at Newark did not warrant the use of a full P3 with its associated risk transfer, and instead decided to procure the new terminal under a design-build contract. It is intended that the parking garage will also be procured as a design-build, with the other elements of the redevelopment being procured through traditional design-bid-build. The Port Authority is separately procuring an operation, maintenance and concessions contract for the new Terminal One (including managing gate allocation, security and concessions management). It has appointed an operator and concessions manager to advise on the design of the new terminal, with the expectation that this entity will subsequently be appointed as the long-term operator of the new terminal. 

Moving west, in November 2017, Kansas City voters approved a new US$1 billion single-terminal design for Kansas City International Airport to replace three existing terminals. Kansas City International Airport, located in Missouri, serviced 11.5 million passengers in 2017.  The new terminal will be built on the site of the existing terminals over a period of 3-4 years. Kansas City Council has promised that the new development will be paid for by airlines and fees, not tax dollars, and it is expected that debt to finance the project will be raised by the private developer. A memorandum of understanding was finalized with a developer in February 2018 and the parties are now working towards a final contract and design. The Kansas City Aviation Department will be responsible for all operation and maintenance of the new airport following handover of the project on substantial completion. 

Terminal leasing

Another option available to airports is to lease an entire terminal to a private sector entity. While it is possible to lease a terminal to any private entity, generally a lease of this nature will be with an airline. The lease will have a multi-decade term and will typically include obligations on the airline to operate, maintain and perform upgrades and improvements to the terminal in exchange for the airline having the right to receive all rental payments from retail concessions and to sub-lease gates to other airlines. The public owner will receive rental payments for the lease but will forfeit any opportunity to generate other profits from the terminal.

The Port Authority is currently soliciting master-plan proposals for a proposed US$10 billion revitalization of John F. Kennedy International Airport (JFK) and has announced its intention to pursue an option that involves airline terminal leases. JFK is the primary international airport in the New York City area and was the sixteenth busiest airport in the world based on passenger numbers in 2017. It is likely that the Port Authority has made the choice to upgrade JFK through the use of airline leases on the basis that a number of terminals at JFK are currently leased by airlines, and the structure is sensible for this airport due to the stand-alone nature of the terminals. 

Based on the evidence to date, it does not appear that states, cities or authorities have a favored procurement approach to development projects and may be willing to pursue a variety of approaches in the right circumstances. For example, following the success of its Great Hall Project, Denver International Airport is proposing to add an additional 39 gates by 2021 in a US$1.8 billion redevelopment program. However, in contrast to its Great Hall Project, the airport is not looking to achieve this redevelopment through a P3 but is instead proposing to finance the improvements from its large capital budget and to retain operational control. The Port Authority is another example of a public entity selecting different financing and development options on a case-by-case basis, taking into account the particular characteristics and needs of the airport in question: while it undertook the LaGuardia project as a P3, it undertook the Newark project on a fully contractual design-build basis and is likely to use a terminal leasing model at JFK.

Privatization

Airport privatization refers to the outright sale or long-term lease of an entire airport, and is another option available for implementing airport improvements and increasing airports' profitability and operation levels. The airport privatization process can be effected either under or outside of the Federal Aviation Administration's (FAA) airport privatization pilot program (APPP). 

The FAA established the APPP in 1997 as a way of allowing airports access to sources of private capital for airport improvement and development. Under the APPP's present iteration, ten airports may be privatized under the scheme. In certain circumstances (which are described below), privatization under the APPP allows the airport owner to use the proceeds from the sale or lease of airport land for non-airport purposes (such proceeds must otherwise be used solely for airport operating capital) and can also exempt the sponsor from obligations to repay federal grants and return property acquired with federal assistance upon the lease or sale of the airport. However, in order for the public owner to keep the sale or lease proceeds from a privatization, the public owner must obtain consent from 65 per cent of airlines then operating at the airport. Only twelve airports have applied to the APPP in the past twenty years, of which only two have successfully achieved privatization under the program, with one of those being returned to public control after just seven years. 

The 2017 Congressional Research Service report "Airport Privatization: Issues and Options for Congress" suggests that the limited participation in the APPP is due to major stakeholders having different, if not contradictory, objectives and interests. An airport owner's incentive to privatize an airport is often the prospect of using the proceeds of the privatization to fund non-airport purposes and, thus, to effectively monetize its airport asset. However, as noted above, such a reallocation of proceeds would require approval by 65 per cent of the airlines using the airport, and airlines are unlikely to approve an arrangement which is likely to result in an increase in fees (taking into account private sector profit motives) unless these funds are being routed back to pay for airport improvements. Airlines will therefore need to be convinced of other benefits, such as additional investment or improvements to the operation of the airport that would not be possible without a privatization. Such an arrangement may be difficult to justify given that public airports have access to many other sources of funding (e.g. federal grants, tax-exempt bonds and PFCs) which reduces the need to access private forms of capital and financing to undertake improvement projects. 

The 2012 "Considering and Evaluating Airport Privatization" report of the Airport Cooperative Research Program points out that the US is distinct from the rest of the world in terms of the substantial input and control in capital investment decisions that airlines have as a function of the prevalence of use and lease agreements between airlines and airports. Such input and control can make it more difficult for private operators to maximize profits at airports. These tensions coupled with the average three-year approval timeline under the APPP may explain the limited success of this type of privatization.

Successful privatizations

There have been only two successfully-closed airport privatizations in the US: the Luis Munoz Marin International Airport in San Juan, Puerto Rico and Stewart International Airport in Newburgh, New York. Of these two, the Luis Munoz Marin International Airport remains the only US airport with a public-private structure under the APPP. The airport privatized operations in 2012 in a 40-year concession and renovation deal, with US$615 million paid upfront to the airport and an ongoing revenue-sharing arrangement. Although there was significant political and social opposition to the privatization, the then Governor of Puerto Rico pointed to the immense fiscal pressures being endured by the Commonwealth and noted that there were no funds available for investment in the airport's infrastructure. Privatization was chosen as the right balance to continue airport improvement while preserving the Commonwealth's resources. 

Stewart International Airport became the first airport to privatize its operations in 2000, when the New York State Department of Transportation granted a 99-year lease to a private sponsor. In 2007, however, the airport reverted back to public operation after attempts at increasing passenger traffic proved unsuccessful and the Port Authority bought back the remaining term on the lease for US$78.5 million. 

Current active applications

A preliminary application for the privatization of Westchester County Airport in New York was accepted under the APPP in December 2016. In November 2017, Macquarie Infrastructure Corporation was chosen from three bidders to run the airport. If agreed by County legislators, the deal will include a 40-year lease, US$595 million in payments and US$550 million in capital funds to improve the airport's infrastructure. However, recent media and industry reports suggest that the deal may be in trouble, with a change in administration and Macquarie's letter of credit backing the concession expiring in early 2018. 

The FAA approved a preliminary application under the APPP from St. Louis Lambert International Airport in St. Louis, Missouri, in April 2017. A selection committee announced a winning consultant team in January 2018 that will give a recommendation on whether to pursue privatization.

Hendry County Airglades Airport in Clewiston, Florida received preliminary approval under the APPP in October 2010. In 2014 the FAA approved a management contract, and the County is currently working with the proposed private operator to finalize its APPP application. 

Withdrawn applications

The remaining seven airports withdrew their applications at various stages and for various reasons, including lack of public support and the inability to obtain financing or suitable construction bids. In fact, Chicago Midway International Airport made two attempts at privatization under the APPP, neither of which was successful. The airport first received initial approval from the FAA to lease the city-owned airport to private investors, but an initial deal was delayed due to the selected consortium's inability to secure financing in the midst of the financial crisis. The airport later abandoned yet another attempt in 2013, after one of the two groups bidding for the lease withdrew. It has since opted to undertake large-scale renovations without any private sector involvement, as discussed above.

Air traffic control

Privatization of an airport does not include privatization of the airport's air traffic control functions. While airports in the US are generally owned and operated at the state and local level, air traffic control (ATC) is operated and controlled at the federal level. However, changes to the APPP and the ownership of air traffic control may be coming in the near future. The FAA's existing authorization was set to expire on September 30, 2017 but Congress initially extended the reauthorization deadline to March 2018 and has now further extended it to September 2018, avoiding a partial shutdown of the agency. 

Part of the reason for delay in passing a long-term reauthorization bill is a debate over whether to privatize the air traffic control system. The House FAA reauthorization bill earlier this year provided for ATC privatization, although this was ultimately dropped for the further short-term extension to September 2018. In contrast, the Senate is opposed to ATC privatization and the Senate bill included a controversial First Officer Qualification rule, which allows for additional avenues for pilots in training to meet the flight hours requirement. The National Association of State Aviation Officials (NASAO) is of the view that, because these stakeholders are pushing different, but equally controversial, changes this decreases the likelihood that Congress will pass a multi-year authorization bill in the immediate future. Failure to pass such a long-term bill is likely to cause airports to be even more wary about beginning the long road to privatization under the APPP.

Infrastructure Principles

The White House issued its Infrastructure Principles in February 2018, which offer benefits for airport infrastructure. The Infrastructure Principles outline a framework to remove the current limitation on the number and size of airports that can participate in the APPP, and to decrease the percentage of airlines required to approve privatization from 65 per cent to a majority vote. The White House asserts that taking such action would reduce barriers to alternative project delivery for airports, as well as providing more flexibility for carriers to approve privatization.

Other measures relating to airports which are recommended in the Infrastructure Principles include:

  • amending the law (49 U.S.C. 47107) to limit FAA approval and oversight of non-aviation development activities to create more efficient FAA oversight of critical airfield infrastructure;
  • clarifying the authority under the AIP (49 U.S.C. 47110) to permit additional financial incentives, along with profit margin, for contractors to increase work efficiency and reduce project completion times;
  • revising statutory requirements for the AIP to shift FAA oversight from grant applications to post-expenditure audits to expedite conveyance of funds to sponsors; and
  • amending project eligibility in the Transport Infrastructure Finance and Innovation Act to enable the offer of loans and other credit assistance to non-federal airport projects (e.g. renovated or new passenger terminals, runways and related facilities) to incentivize project delivery for airports and to accelerate overall improvements in airport infrastructure.

It remains to be seen whether the Infrastructure Principles will become law. In addition, the extent to which they will have any significant impact on the rate of improvement, the number of airport development projects or the development delivery models selected remains unclear. However, it is certainly clear that the current administration is prioritizing the development and improvement of airport infrastructure.

Looking to the future

It is clear that US airports need investment and that there are a wide range of tools and models available to airport owners to implement and finance these improvements. Every airport project is different and the best way to implement improvements will likewise differ from project to project, as is demonstrated by the Port Authority examples referred to above. Airports need to find ways of effectively weighing all available options to determine the best fit in each individual case. 

Leveraging the private sector to make use of its ability to take on and manage risk and to implement best operational practices to drive growth needs to outweigh the increased financing costs of doing so. Proposed changes to the law may also improve the attractiveness of using P3s or privatization. Ashurst is well placed to guide public and private sector clients through the complex considerations and challenges associated with any airport infrastructure project.

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InfraRead Issue 8

US public-private partnerships

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