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

Created: June 8, 2004

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.”

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