New Economics: Technology, use and lease agreements lead discussion at this year's ACI-NA conference

Inside the Industry

New Economics

Technology, use and lease agreements lead discussion at this year’s ACI-NA conference

By Jodi Richards

June 2004

SAN DIEGO — At the Airports Council International-North AmericaEconomic Specialty Conference held here in April, the theme was TheNew Airport Economics — Management, Technology & Efficiency.Much discussion focused on technology, including wireless, and the
changing relationship between airports and airlines, particularly with use and lease agreements, as expressed by two presenters, Jerry Olivier and Scott Lewis.

Jerry Olivier of Convergent Strategies Consulting, Inc., says there is in essence a technology adoption curve. As an example, he says, cell phones have been adopted to the point that they are now a mature technology. And while wi-fi is relatively early in the curve, he expects that within two to three years it will become an expectation in airports.

He calls for a new concession model related to wi-fi, one that focuses on sales to providers — not consumers. Olivier says concession agreements should be short-term and airports should structure minimum annual guarantees in the contracts.

According to Olivier, airports should plan on having two separate RFPs for wireless: one for unlicensed and one for wi-fi. Other requirements include competitive bid for access rights; MAG based on industry research; short-term (2-3-year) contracts; public connectivity only.

He says airports will need to foot the bill for wireless infrastructure. “Operational wi-fi is going to become increasingly critical,” says Olivier. “But money is not worth the political headache. You’re better off dumping it into rates and charges and call it the cost of operating an airport.”

USE AND LEASE AGREEMENTS
According to Scott Lewis, partner, Palmer & Dodge LLP, most airport management has little or no experience dealing with use and lease agreements because many airports don’t have them or, in other cases, they were long-term leases. Some basic principles airports should keep in mind:

  • Use and lease agreements are not required. “It’s just assumed,” says Lewis. “You need to ask the fundamental question, Why should we have a use and lease agreement? Both the airport and the airlines need to ask, What are the benefits and costs of a use and lease agreement?”

To answer that question, says Lewis, both need to understand what would happen at the airport if there wasn’t a use and lease agreement.

In the absence of an agreement, explains Lewis, the airport owner retains and controls non-airline revenues. The airport controls facilities and a capital program, and retains flexibility, but at the same time bears all the entrepreneurial risk of airport operations.

More thoughts from Lewis ...

  • Local conditions for airports and airlines vary widely. “What this means is use and lease agreements that are optimal will not be the same at every airport,” he says. Some of the factors that will play a role include nature of market (O&D or hub), mix of carriers, utilization of capacity, financial strength of the airport, and political factors. “You can expect agreements to vary from airport to airport.”
  • Old forms of agreements are unlikely to serve as a useful template for new agreements. The market is drastically different from when the old agreements were created, particularly with the credit rating of airports having gone up and the credit of airlines having gone down. “Also, airlines have been deregulated while airports have been increasingly regulated by the federal government,” says Lewis. “Use and lease agreements need to take into account today’s circumstances.”

Some essential attributes of use and lease agreements include: the formula that determines the landing fee and the terminal rent; provisions that govern facility use and control; provisions that govern the capital program and prescribe how it is controlled; provisions for financial assurances.

“The key issue in the negotiations of these deals is to what extent will the airport share non-airline revenue with the airlines,” says Lewis. “Under federal policy, in the absence of an agreement, airports don’t have to share any of their non-airline revenue with the airlines.”

  • Because different airlines have such different business models, the presumption that all the use and lease agreements will be the same for all the carriers at your airport is not secure. However, says Lewis, this problem may disappear in the years to come if the business models of the low-cost carriers and legacy carriers converge, as many predict.

A few other considerations: How are preferential gates assigned? What rules are used for accommodation? What are the rules for recapturing underused gates and reassigning them to other airlines?

  • Use and lease agreements should not impair the airport’s ability to optimize the use of its facilities. In particular, this is an issue for airports that have capacity constraints “It’s often the case that airlines will resist regulating use of facilities to optimize efficiency,” explains Lewis. And therein lies the dilemma — airlines don’t want to pay for capital expansion, but they also do not want to help optimize facility use.

As for majority in interest agreements, Lewis says the case for retaining them is now weak. “Consider why you’re giving up control of your capital program,” he says. “What are you getting in return? Is it worth it?”

  • In today’s environment, airline financial assurances need to be questioned. Lewis says airports only need to look at Pittsburgh International Airport and the challenges it is facing with US Airways.

“Be careful that your agreements give you real financial security,” adds Lewis.

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